The Government has announced further protective measures for tenants of commercial premises to add to what is becoming a long list of previously unthinkable interventions in the normal operation of legal enforcement measures. Commercial tenants will now be protected from compulsory winding up if the court is of the view that the reason the company is unable to pay its debts is due to the Coronavirus Crisis. Also, Commercial Rent Arrears Recovery processes will not apply to rent arrears unless they are older than 90 days.
How will the courts determine a reason a company cannot pay its debts due to Coronavirus?
In one interpretation, if the company has lost its income due to Coronavirus then all debts would be caught in this test and effectively the compulsory winding up process would be defunct. A more sophisticated view needs to be taken and there is a clue with the commercial Rent Arrears Recovery provisions whereby the restriction does not apply to rent arrears over 90 days old. Consequently, it is likely that if a debt was outstanding and not paid before the crisis, then a petition will be, and should be, allowed to proceed. These measures follow on from the restriction on forfeiting commercial leases already in place.
The measures will be welcomed by many businesses and will assist some in surviving the current crisis, which is obviously to be welcomed by all. There has to be a balance in these measures though. The justification given by the Government for constraining landlords in this way is the availability of the other aspect of Government support in the form of Coronavirus Business Interruption Loans (CBIL).
However, these loans are also equally available to tenants. This gives rise to the rather unfair scenario where a tenant company takes out a CBIL and doesn’t use it to pay the rent due to its landlord, yet the landlord can do absolutely nothing about it. An easy fix would be to impose a condition on commercial tenants that if they take out a CBIL they must pay all, or at least a proportion, of their rent.
Another safeguard for creditors removed temporarily is wrongful trading. This imposes personal liability on directors of a company if they continue to incur debt when their company is unlikely to avoid insolvent liquidation. This had to be introduced otherwise the risk to directors of companies who took out a CBIL would be huge. The reason for taking out a CBIL is because your company cannot pay its debts due to the crisis. Taking on more debt with interest payable, in those circumstances would almost certainly lead to a finding of wrongful trading if the company did subsequently go into insolvent liquidation. Some safeguards do remain though, and directors still have to act in the best interests of the company and cannot misapply funds. It will be interesting to see in the future how much scrutiny is applied to how CBILs are used in the 9o day period for which these safeguards are temporarily suspended.
Is a CBIL the answer though?
If a business cannot pay its debts now and the indications are that restrictions are going to be in place for longer than the optimists originally thought, how are they going to be able to meet their continuing liabilities and repay the loan, after an even longer period of restrictions? Furloughing staff and not paying rent will obviously help but when these schemes end where are the funds coming from to pay these liabilities, which will be ongoing and, in the case of rent, the arrears that will have built up?