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Insolvency Practitioners: the regulator’s reach is wide when it comes to integrity
The current global pandemic has provided and will continue to provide plentiful opportunities for fraud and opportunism. One area which is potentially open to abuse is the protection of companies from the service of statutory demands or the presentation of winding up petitions following the enactment of the Corporate Insolvency and Governance Act 2020 (CIGA). It is important to consider alternative remedies if a debtor seeks to use this to their advantage.
The effect of CIGA is that a winding up petition cannot be presented for failing to comply with a statutory demand where the statutory demand was served in the relevant period. The relevant period began on 1 March 2020 and has just been extended to 31 December 2020. It is possible this will be extended further. No winding up petition can be presented at all in this period unless the creditor presenting it has reasonable grounds for believing that coronavirus has not had a financial effect on the company or that the facts causing the insolvency would have arisen even if coronavirus had not had a financial effect on the company.
This can buy valuable time for the directors of a company intent on fraud to strip a company of its assets, leaving creditors without even the, sometimes limited, remedies available in a winding up.
This can be particularly difficult in the case of a company desiring to avoid the continuing liability for a lease. Imagine a scenario where the directors of a leaseholder of an expensive retail property in Central London (Company A) carry out a company restructuring exercise in the months before the pandemic, which results in the transfer of all the assets of Company A to another company in the group (Company B), but leaving the liabilities under the lease with Company A. Despite the apparent premeditation of these acts Company A then asserts that it can no longer afford to pay the rent because of the effect of coronavirus on its business, thereby attempting to engage the prohibitions in CIGA on the presentation of winding up petitions.
The landlord faced with such a situation might first consider forfeiting the lease, subject to the current restrictions on those steps. However, even if permitted, in the current climate that is not a particularly attractive option and will result only in the landlord obtaining vacant possession of a property which is likely to remain vacant for some time and only be able to be rented to another tenant at a vastly reduced rent.
With this avenue not viable, and Company A clearly insolvent, winding up might be considered. However, this may be problematic because of CIGA. It is quite possible that the Court would not be persuaded that the landlord has a reasonable belief that coronavirus had not had a financial effect on the company or that the company would have been insolvent even if coronavirus had not had a financial effect on Company A. If this was the outcome a petition would not be able to proceed.
As an aside, we recently were successful in obtaining a winding up order, where a restructuring of a trading subsidiary which later went into voluntary liquidation had left the parent with no assets or income to pay debts owed by it. The parent did not resist the petition, and the court held that we had satisfied the test, but on the basis that the debt arose prior to the pandemic. If it had been resisted I have no doubt this would have been appealed, as the time a debt came into existence cannot be relevant to the test in CIGA as to the effect of the coronavirus. I remain of the view that we were nevertheless entitled to a winding up order, but not for the reason the court gave.
The effect of a liquidator being appointed in the case of Company A would be almost certainly be that they would disclaim the lease – leading to the same outcome as forfeiture – an empty, difficult to let premises. The difficulties inherent in obtaining a winding up order, and in the effect it would have even if one could be obtained may well lead the landlord to seek other remedies.
So what would a well advised landlord do in this situation? The restructuring by which the assets were transferred from Company A to Company B leaving company A with no assets and a liability under the lease would clearly be transfers at an undervalue. They may well also be transactions with intent to defraud creditors under s423 of the Insolvency Act. The advantage of this remedy is that it can be brought by any victim of the transactions and does not need to be brought by a liquidator in a winding up. Company A would not even need to be made insolvent as a result of the transactions. The crucial element is that there should be an intention to put assets out of the reach of a person who might at some time make a claim.
The court then has wide discretion as to the remedies it can grant. The claim would be brought both against Company A and Company B and in this case would require the assets of Company B to be returned to Company A in order to provide it with the means to satisfy its continuing rent obligations.
Whilst the pandemic causes problems for creditors and opportunities for directors who wish to commit fraud, ensuring that you take a step back and consider all the remedies available can provide you with an effective course of action.
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