Citing Covid 19 is not an automatic defence for avoiding debts

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Citing Covid 19 is not an automatic defence for avoiding debts

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We have heard a lot from the Government recently in terms of changes to the Insolvency Legislation. Whilst much of this is welcomed, we are seeing a growing number of debtors wilfully interpreting and citing Government Press Announcements (GPAs) in the bid to stymy a legal action for recovery of debts / security enforcement. 

The decision in Shorts Gardens LLB v London Borough of Camden Council [2020] EWHC 1001, with its emphasis on the application of actual law (as opposed to a debtor’s interpretation of a GPA), will come as a welcome relief to creditors. The Shorts Gardens decision also confirms that a debtor cannot merely plead the pervasive impact of Covid 19 on the economy / their specific sector as a defence to a debt recovery action. Rather, they will need to adduce evidence as to Covid 19’s direct impact on their business and how by such impact, they are unable to pay the debt that is due. 

 

Shorts Gardens involved the hearing of two separate applications from debtors to restrain the presentation of a winding-up petition. Both Applicants sought to rely on the GPA made on 23 April 2020 which read:

 

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 2020, through to 30 June 2020, where a company cannot pay its bills due to coronavirus”.

 

Neither application however involved payment of rent arrears as a retail tenant. The debts in Shorts Gardens concerned arrears in non-domestic rates and unpaid litigation costs. That point however, did not stop the debtors from arguing the 23 April 2020 GPA was intended to apply to all and any business sectors and economic activity. Nor did that applicants pay any attention to the fact that a GPA is not in itself, actual law. 

 

In dismissing the Applications in Shorts Gardens, Mr. Justice Snowdon made the following observations:

 

      1. As no draft legislation had been tabled further to the 23 April 2020 GPA, he was bound to make his decision on the Applications on the basis of the law as it stands (i.e., for an injunction restraining presentation of a petition, there is needs a genuine dispute to the debt or, that the petition would amount to an abuse of process etc.).

 

      1. Any proposed legislation (pursuant to the 23 April 2020 GPA) will very likely be limited to statutory demands and petitions based upon claims by landlords for arrears of rent and not to all debts per se.

 

      1. The restrictions on the use of statutory demands and presentation of petitions, will only apply where the company is able to evidence to the Court’s satisfaction, that it is unable to pay its debts directly as a result of Covid 19. Hence a debtor is unlikely to be able to meet this evidential threshold in respect of debts outstanding since before the outbreak of Covid 19 in late February / early March 2020.

 

The decision and clear judicial view expressed in Shorts Gardens is timely. We are increasingly seeing for ourselves, debtors wilfully citing the 23 April 2020 GPA (amongst others), together with the negative impact COVID 19 on the wider economy, as establishing a bar to our clients issuing a statutory demands, winding-up petitions or commencing any debt recovery action altogether.  The decision in Shorts Gardens should prove significant in debunking this myth and removing debtors’ complacency over payment of debts over the course of the Covid 19 Pandemic.

 

If you are concerned over collection of debts / security enforcement and/or debtors seeking to rely on Covid 19 to avoid payment, please contact William Angas and Ben Ashworth.

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. PDT Solicitors LLP accepts no responsibility for the content of any third party website to which this webpage refers.

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