COVID-19 NOT A GOOD REASON TO RESTRAIN PRESENTATION OF WINDING UP PETITIONS (ON THE FACTS OF THIS CASE)

In Shorts Gardens LLB v London Borough of Camden Council [2020] EWHC 1001 (Ch) Mr Justice Snowden did not accept that COVID-19 and prospective legislation by the government in relation to insolvency was a good reason to restrain winding up petitions.

 

THE CASE

The applicants sought to restrain the presentation of two winding up petitions by the respondent councils.  One of the grounds of arguments related to Covid-19.

 

THE JUDGMENT ON THE COVID-19 ISSUE

After rejecting the applicants’ case on several grounds the judge considered an argument based on COVID-19.
    1. The final ground relied upon in both applications is the COVID-19 pandemic. Reliance was initially placed in the evidence upon Ministerial Statements and reports that the Government was considering enacting temporary measures making changes to the insolvency regime during the pandemic.
    2. After I had reserved judgment, on 23 April 2020, under the heading “New measures to protect UK high street from aggressive rent collection and closure”, the Ministry of Housing, Communities and Local Government and the Department for Business, Energy & Industrial Strategy announced that the Government was intending to bring forward emergency legislation relating to the use of statutory demands and the presentation of winding up petitions.
    3. The press announcement stated,
“High street shops and other companies under strain will be protected from aggressive rent collection and asked to pay what they can during the coronavirus pandemic, the Business Secretary has set out today (23 April 2020).
The majority of landlords and tenants are working well together to reach agreements on debt obligations, but some landlords have been putting tenants under undue pressure by using aggressive debt recovery tactics.
To stop these unfair practices, the government will temporarily ban the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions presented from Monday 27 April, through to 30 June, where a company cannot pay its bills due to coronavirus. This will help ensure these companies do not fall into deeper financial strain. The measures will be included in the Corporate Insolvency and Governance Bill, which the Business Secretary Alok Sharma set out earlier this month.”
    1. After setting out quotes from various people focusing on the position of retailers and companies in the hospitality business, under the heading “Notes to Editors” the press announcement stated,
“Under these measures, any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19.
The new legislation to protect tenants will be in force until 30 June, and can be extended in line with the moratorium on commercial lease forfeiture.”
    1. Although the clear focus of this announcement is on the plight of tenants of retail and commercial properties facing demands from their landlords, Mr. Clark pointed out that some parts of the Government’s announcement could be interpreted to indicate that a much wider ban is contemplated – e.g. “High street shops and other companies under strain…” and “any winding-up petition that claims the company is unable to pay its debts must first be reviewed by the court to determine why” (my emphasis). Taken on its own, that last statement would apply to every creditor’s winding-up petition proposed to be presented.
    2. In support of his argument, Mr. Clark then sought permission to refer to the new statements produced by Ms. Harper and Mr. Van Huyssteen at the hand down hearing.
    3. The background to the production of those new statements is that there was no indication in any of the original evidence from Ms. Harper and Mr. Van Huyssteen that either SBLT or Short Gardens was in financial difficulty. Quite the reverse, the emphasis was upon the fact that SBLT and Shorts Gardens were each disputing the underlying liability orders, and SBLT was asserting a cross-claim. Indeed, in each of his skeleton arguments on their behalves, Mr. Clark expressly stated,
“For the avoidance of doubt, the applicant does not contend that it faces liquidity or operational challenges as a result of circumstances related to COVID-19.”
    1. It therefore came as something of a surprise that in Ms. Harper’s new statement she asserted, in relation to SBLT,
“The charity [sic] is in financial difficulties because the funding it had hoped to receive under the small business grants of £10,000 has not yet materialised and all of the charity income from personal property storage has stopped because its clients who are mainly on low income cannot afford to pay as the majority have either been furloughed or have lost their jobs completely.
It is a fact that does not have to be proved, judicial notice, that almost all companies, but for some specialist companies, as in pharmaceuticals, specialist clothing, personal protection equipment or delivery companies, are affected by COVID-19 and we like all companies in the United Kingdom and the World are going to suffer from cash flow restrictions caused by the effect of the coronavirus.”
    1. Likewise, in relation to Shorts Gardens, Mr. Van Huyssteen stated,
“…Shorts Gardens LLP is a property company that receives its income from rents since its tenants cannot pay as they have no income because of the effects of the COVID-19 pandemic.
It is a fact that does not have to be proved judicial notice that almost all companies, but for some specialist companies as in pharmaceuticals, specialist clothing, personal protection equipment or delivery companies, are impacted by COVID-19 and we, like all companies in the United Kingdom and the World are going to suffer from cash flow restrictions caused by the effect of the coronavirus.”
    1. There was, however, no further detail given, and no financial information of any sort provided, as to the position of either SBLT or Shorts Gardens. Still less was there any explanation of the complete volte face that both applicants had performed in comparison to the way in which their argument had been put at the first hearing.
    2. At present, although the indication in the Government’s press announcement is that the proposed restrictions are intended to apply from next Monday 27 April 2020, no draft legislation has been published. The scope of the intended restriction and precisely how it will be implemented is unclear.
    3. Mr. Clark therefore accepted, rightly, that I had to make my decision on the basis of the law as it stands; but he submitted that I could and should exercise my discretion as to whether it was just and equitable to grant an injunction on the basis of the new statements from Ms. Harper and Mr. Van Huyssteen, viewed in the light of the Government’s announcement.
    4. In that regard, in relation to SBLT, apart from Ms. Harper’s lack of standing to which I have already referred, it does seem entirely clear that the proposed future restrictions on the presentation of petitions will not in any event not apply to the SBLT Petition, which, as I have indicated, was in fact presented on 25 March 2020 in Manchester and should be accepted as having been properly presented on that day.
    5. Secondly, it seems overwhelmingly likely that the proposed legislation will be limited to companies in certain identified sectors of economic activity, and to relate to statutory demands and petitions based upon claims by landlords for arrears of rent. Although the press statement does contain phrases that might, if taken out of context, suggest a wider prohibition, when those phrases are read in the broader context of the announcement as a whole, I anticipate that the prohibitions are not intended to extend to entities such as SBLT and Shorts Gardens, neither of which is a tenant in the retail or hospitality industry, or to petitions which are not based upon arrears of rent, but are based upon outstanding court orders and longstanding arrears of NNDR owing under liability orders to local authorities.
    6. Further, it seems from the Government’s announcement that some threshold test is envisaged under which the restrictions on use of statutory demands and presentation of petitions will only apply where the reason that the company is unable to pay its debts is due to the coronavirus (although the mechanism for the application of that test is entirely unclear).
    7. In this regard, I note that although the new statements from Ms. Harper and Mr. Van Huyssteen make sweeping statements about the economic effect of the coronavirus, they do not actually contend that SBLT or Shorts Gardens is unable to pay its petition debts as a result of the effects of the coronavirus. Still less do the statements give any credible details to support any such conclusion. In fact, as Mr. Gosling pointed out, the majority of the unpaid debts upon which the petitions are based pre-date the impact of the coronavirus and have hitherto been contested for entirely different reasons.
    8. In these circumstances, I do not accept Mr. Clark’s submissions. In my judgment the volte face of Ms. Harper and Mr. Van Huyssteen as to the financial difficulties of SBLT and Shorts Gardens is entirely opportunistic and not credible. The reason that SBLT and Shorts Gardens have not paid the debts that they owe has nothing to do with the coronavirus, and they are not the sorts of entity owing the type of liabilities which the proposed legislation seems to be intended to protect. I therefore see no reason to exercise any discretion in favour of the applicants based upon the prospect that legislative measures are to be introduced to assist more deserving companies experiencing genuine financial hardship caused by the effects of the COVID-19 pandemic.
    9. Independently of their arguments concerning the financial positions of SBLT and Shorts Gardens, the applicants also suggested that since the court system is under strain as a result of the pandemic, the challenges of SBLT and Shorts Gardens to the liability orders that formed part of the basis for the petitions against them might only proceed very slowly. They contended that it would be unjust for them to face winding up proceedings before they had the chance to exhaust their challenges to the liability orders.
    10. I reject that submission. It obviously has no application to the unpaid costs orders in the SBLT case, and the manifest lack of merit in the challenges that have been mounted to the liability orders thus far gives no hint that SBLT or Shorts Gardens will have any more legitimate basis for challenging the orders in the future. Moreover, if there were any merit in such an argument in either case, it will be capable of being made on the basis of known facts and the then current circumstances prevailing at the date when the petition comes to be heard, rather than being made on a speculative basis now. There is also no just basis upon which to deprive creditors of the benefit of presenting petitions now in order to obtain the earliest possible relation-back date for the purposes of challenge to antecedent transactions.

DISPOSAL

  1. For the reasons that I have now given, I refused both applications and dismissed them as an abuse of process. I also declared that both applications were totally without merit.
  2. I ordered Ms. Harper and Shorts Gardens to pay the costs of Camden and Preston of their applications on the indemnity basis, and summarily assessed those costs in the amounts of £4,600 and £4,150 respectively.
  3. I further directed that the petition in relation to SBLT should be endorsed by the court as having been properly presented on 25 March 2020.