The Corporate Insolvency and Governance Act 2020: A real estate focused overview

Statutory Demands and Winding-up Petitions

Schedule 10 of the CIGA introduces temporary amendments to the rules relating to statutory demands and winding up petitions.  

Paragraph 1 of Schedule 10 prohibits the presentation of winding-up petitions on or after 27 April 2020 on the basis of statutory demands served during the "relevant period".  The "relevant period" for this purpose is defined as beginning on 1 March 2020 and ending on 30 June 2021.¹ This period can be extended by up to six months by the Secretary of State, more than once if it's considered necessary. 

The effect of paragraph 1 is to neutralise the effect of any statutory demands served during the relevant period.  If landlords want to rely on statutory demands to ground a winding-up petition, they will need to wait until the relevant period has expired and issue a fresh statutory demand. In reality, therefore, landlords will almost certainly refrain from serving statutory demands during the relevant period, preferring to pursue their other remedies instead.   

This isn't the first time that the government has interfered with landlord's remedies in the event that their tenant's default.  The government has also recently temporarily removed the landlord's ability to forfeit for rent arrears (section 82 of the Coronavirus Act 2020) and prevented landlords from taking control of tenant's goods ("CRAR"), unless there are arrears at least equivalent to 189 days' rent (The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (No.2) (Coronavirus) Regulations 2020).   

Debt claims tend to be a last resort for landlords, given the time and cost involved, but, in these exceptional circumstances, we expect to see more landlords bringing debt claims for arrears.  This is the case even though the various temporary limitations may have been lifted by the time a judgment is received.  

Landlords who already have debt judgments in their favour may be considering using that judgment as a ground for presenting a petition to wind-up the tenant company, however, such plans may also be prevented by paragraph 2 of Schedule 10. 

Paragraph 2 operates so that a creditor may not, during (a slightly different) relevant period (from 27 April 2020 to 30 June 2021² (extendable by up to six months by the Secretary of State, more than once if necessary)), present a petition for the winding up of a registered company on the basis that it is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 (the "IA 1986"), unless the creditor has a reasonable ground for believing that (a) coronavirus has not had a financial effect on the company or (b) the facts by reference to which the company is unable to pay its debts would have arisen even if coronavirus had not had a financial effect on the company.  Where a company can show that coronavirus has had a financial effect on it before the presentation of the petition (and the courts have found this to be a low threshold), paragraph 5 provides that the court may wind up the company only if it is satisfied that the company would be unable to pay its debts even if coronavirus had not had a financial effect on the company.   We anticipate that many landlords will be unable to satisfy this condition.

Rent deposits 

In preference to issuing a debt claim, landlords often look to draw on a rent deposit to recover rent arrears, particularly where the rent deposit includes a top-up provision.  This enables the landlord to maintain their income stream in return for a reduction in security pending the tenant topping up the deposit.  However, the CIGA restricts these withdrawals for certain rent deposits and landlords should always check whether their rent deposit is caught by the CIGA.  

In addition, a recent court case highlighted that insolvency can change the analysis as to whether to draw down on a rent deposit.  Where tenants are in administration or liquidation, and where the property is being used for the purposes of the insolvency, the rent will be payable as an expense of the insolvency.  However, it has now been confirmed that topping up a rent deposit is not an expense.  Landlords in this situation should instead seek payment of the rent as an expense, and keep their security whole for later use.

Moratorium

Section 1 of the CIGA introduces a new Part A1 into the IA 1986, which will allow eligible companies to benefit from a moratorium providing various protections from creditors.  A company will be eligible for the moratorium unless it falls within the exceptions listed in Schedule ZA1 (which contains a long list of mostly financial services companies). 

In order to benefit from a moratorium, the directors of the company must file a statement at court that the company is, or is likely to become, unable to pay its debts and a statement from an insolvency practitioner (the "Monitor") that it is likely that a moratorium would result in the rescue of the company as a going concern (or, for a temporary period to 30 September³, that it would do so if it were not for any worsening of the financial position of the company for reasons relating to Coronavirus).  

The moratorium will last for an initial period of 20 business days but may be extended by the directors by a further 20 business days without creditor consent.  Extensions of up to a year may be agreed with creditor consent or for a longer period with the consent of the court. 

The moratorium provides a payment holiday in relation to pre-moratorium debts that have fallen due before the moratorium or which fall due during the moratorium, except in so far as they consist of amounts payable in respect of (emphasis added):

• The Monitor's remuneration or expenses;
• Goods or services supplied during the moratorium;
• Rent in respect of a period during the moratorium;
• Wages or salary arising under a contract of employment;
• Redundancy payments; or
• Debts or other liabilities arising under a contract or other instrument involving financial services (as defined in Schedule ZA2).

During the moratorium, a landlord will only be able to exercise a right of forfeiture by peaceable re-entry, enforce security or institute, carry out or continue any legal process (including issuing a winding-up petition), with the permission of the court and only in respect of rent for the period of the moratorium.  In contrast to administration moratoria, landlords will not be able to apply for permission of the insolvency practitioner or court to forfeit in relation to pre-moratorium debts for which the company has a payment holiday during the moratorium (which includes pre-moratorium rent arrears).  

Tenants will be obliged to pay rent during the moratorium and, if they fail to do so, the Monitor can terminate the moratorium.  Whether "rent" means basic rent or extends to other sums which are defined in the lease as rent is unclear (note that the Coronavirus Act 2020, which prevents forfeiture, defined rent as including all sums payable under the lease – it is interesting that  the CIGA has not adopted the same definition).  However, service charge due during the moratorium is likely to remain payable as the tenant remains obliged to pay for all services supplied during the moratorium.  Whether insurance can be classed as a 'service' is up for debate.  

If the moratorium is successful, the payment holiday will come to an end and the company will be obliged to pay its debts, including any accrued interest.  The likelihood is that these moratoria will be followed with another insolvency process, for example administration.  In that scenario, the pre-moratorium debts will be dealt with as part of that process.

Restructuring Plan

Complementing the moratorium, Schedule 9 of the CIGA introduces a new Part 26A to the Companies Act 2006 in relation to the new restructuring plan which will provide a company encountering financial difficulties with the ability to propose a compromise or arrangement with its creditors and/or shareholders to restructure its affairs.  The framework of the restructuring plan shares some of the features of the UK's existing scheme of arrangement procedure.  Additionally, the new restructuring plan allows courts to sanction a plan that binds dissenting classes of creditors and members, provided (a) they are no worse off than in the alternative scenario (i.e. the winding-up of the company), (b) the plan is approved by a class which has a genuine economic interest in the alternative scenario, and (c) the plan is just and equitable and in the interests of creditors.  The process of binding dissenting classes in this way is called 'cross-class cram-down'. 

Schemes of arrangement are not usually used to restructure landlords' rents as landlords form a class of creditors and each class has to approve the scheme.  In theory, the new restructuring plan could be used to restructure landlords' rents as landlords could be "crammed down" as a class meaning that the plan could be passed even though landlords voted against it, however, we anticipate that CVAs will continue to be the process of choice in this regard.

Ipso Facto (termination by reason of insolvency)

Many contracts include a termination right which can be triggered where one of the parties becomes insolvent.  Section 14 of the CIGA introduces a new section 233B into the IA 1986, which will restrict the operation of such clauses in contracts for the supply of goods or services.  This new provision will restrict the supplier of goods or services to an insolvent company from terminating the contract for supply when the company goes into a range of insolvency procedures. The measure will preserve the insolvent company's supply contracts in order to aid its rescue plan. 

Section 233B(5) provides some limited safeguards for suppliers. The section allows a supplier to seek permission to terminate the contract.  Where the company is in administration or liquidation, that consent may be given by the insolvency practitioner.  Where the company is subject to a moratorium, CVA, or restructuring plan, consent may be given by the company itself.  In all cases, a supplier can seek the court's permission to terminate the contract by proving that the continuation of the contract would cause the supplier hardship.

The CIGA does not include a definition of a "contract for the supply of goods or services" and the meaning is potentially broad.  The authors do not consider that a lease would amount to a contract for the supply of goods or services, as a lease primarily creates a proprietary interest and any obligation to provide services is typically ancillary to the supply of land.  
The position is less clear in relation to serviced office agreements, which the authors consider are likely to amount to contracts for the supply of services.  As a result, serviced office providers are unlikely to be able to terminate their contracts in the event of occupier insolvency (unless they obtain consent).  

However, it is common for serviced office agreements to purport to be licences when, in reality, the occupier has exclusive possession of the premises.  Where this is the case, it may be possible for serviced office providers to argue that their agreements with insolvent occupiers are, in fact, leases rather than licences in order to circumvent these provisions.  However, even if such an argument were successful, providers would still be subject to the usual insolvency restrictions on forfeiture and this argument may be unattractive to serviced office providers, because their own leases  will normally prevent the grant of leases (rather than licences) without landlord consent.

Conclusion

The CIGA introduces some big changes for the insolvency regime including some temporary and permanent restrictions on landlord remedies.  The full impact of those changes on landlords will only become clear once companies and insolvency practitioners start to put the provisions into practice.  Setting aside the temporary amendments to the rules on statutory demands, winding up petitions and rent deposits in the authors' view, the biggest change for landlords is the complete prohibition on forfeiture in relation to pre-moratorium debts during the course of a moratorium, and with this in mind, landlords would be well advised to closely monitor and actively manage their tenant arrears position.

1. This date has been extended to reflect The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021.
2. This date has been extended to reflect The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021.
3. This temporary relaxation ceased to have effect on 1 October 2020 as per The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020.

Authors: Alison Hardy (Partner), Chloe Meredith (Associate), Inga West (Counsel) and Samantha Ross (Solicitor).