Author
stephen o'grady

Stephen O'Grady

Senior associate

Read More
Author
stephen o'grady

Stephen O'Grady

Senior associate

Read More

17 June 2020

Lending Focus - June 2020 – 6 of 6 Insights

COVID-19: a shield against winding-up petitions?

  • QUICK READ

Facts

Snowden J heard two applications for injunctions to restrain the presentation of two winding-up petitions, against Saint Benedict's Land Trust Limited (SBLT) and Shorts Gardens LLP (SG), respectively. The respondent creditors were Camden and Preston councils in relation to unpaid liability orders in respect of NNDR (National Non Domestic Rates) and other unpaid costs orders. 

SBLT had been involved in lengthy litigation with Camden and Preston, claiming it was not liable for NNDR because it was occupying the properties for charitable purposes. This was despite the fact that it was not registered under the Charities Act 2011. It was also subject to a general civil restraint order (GCRO), although the injunction application was brought in the name of a director of SBLT. A petition had already been presented against SBLT, but was (wrongly) rejected by the registry on the apparent basis that an application had been filed to restrain its presentation.

At the time of the hearing, the petition against SG had not yet been presented.  However, SG contended that the property subject to the liability order had in fact been occupied by SBLT under licence.

Applications

SBLT and SG both sought injunctive relief, claiming that the debts were genuinely disputed on substantial grounds.

Both contended that it was inappropriate for a winding-up petition to be 'proceeded with', "until 14 days after COVID-19 had been controlled through vaccination and/or the government had announced that it was safe for the UK to come out of lockdown".

The law

An injunction will be granted to restrain the presentation of a petition where the debt is genuinely disputed on substantial grounds. Snowden J set out the reasons for this, as follows:

  • under the Insolvency Act 1986, a creditor's winding-up petition can only be presented by a creditor
  • until a person has established that he is a creditor, he is not entitled to invoke the statutory procedure
  • the winding-up procedure is not the correct forum for resolving a dispute over a debt.

Judgment

Snowden J dismissed both applications, concluding that:

  • SBLT's director did not have standing to bring the application, as the mere holding of office does not give sufficient interest, and the application was a clear abuse of process as an attempt to evade the effect of the GCRO
  • there was, in any event, no genuine or substantial dispute over any of the debts – the debts included costs orders against which there was no appeal, and liability orders which are deemed enforceable until set aside and challenges to them had been dismissed previously, and
  • there was no substance to the cross-claim, which had alleged that monies previously paid to settle a debt had been paid under duress and misapplied.

He also made short shrift of the attempted COVID-19 argument:

  • After judgment was reserved, but before being handed down, the government announced temporary measures to "ban" statutory demands and winding-up petitions where a company cannot pay its bills due to coronavirus. SBLT and SG alleged that, in reliance on the announcement, they were in financial difficulties because of the COVID-19 pandemic.
  • They also urged the Court to exercise its discretion on the basis that it was just and equitable to grant the injunction, given the government's announced intentions.

However:

  • The Court was obliged to decide that, on the basis of the law as it stands, there was not even a draft of the legislation published, and the announcement appeared to envisage a threshold test where the financial difficulty was as a result of the COVID-19 pandemic.
  • There was nothing in the applicants' original evidence to indicate that either SG or SBLT was in any financial difficulty – indeed, the skeleton arguments put to the Court said quite the reverse.
  • Newly-presented evidence also lacked any detail to substantiate the argument. This therefore lacked credibility.

Comment

Since the date of the judgment, the Corporate Insolvency and Governance Bill (the Bill) has been laid before Parliament. The Bill contemplates a temporary ban (until 30 days after the Bill is enacted) on statutory demands presented from 1 March 2020 as a ground for presenting a winding-up petition, and on winding-up petitions presented from 27 April 2020 unless the petitioning creditor has reasonable grounds for believing that COVID-19 has not had a financial effect on the debtor company, or that it would have been insolvent even if COVID-19 had not had a financial effect on it.

Given the court's observation on the position of both the SBLT and SG, it therefore seems unlikely that the Bill, even if enacted in its current form, would have changed the outcome of the application. A 'blanket' approach to the current pandemic as an excuse for non-payment is not likely to be well-received by the courts.

Please refer to our article for more information on the Bill.

Shorts Gardens LLB v London Borough of Camden Council [2020] EWHC 1001 (Ch) (27 April 2020)

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