Background

This case concerned a tenant company that was leasing out a commercial premises. The tenant had fallen into rental arrears and their landlord subsequently petitioned to have the company wound up because it could not pay its debts. The tenant opposed the landlord’s petition, arguing that the rental arrears accrued were a result of the COVID-19 pandemic and its impact on the tenant’s business.

What did the court look at?

A creditor cannot present a winding up petition in relation to non-payment of debts, unless it can prove that the company’s debts are unconnected to the pandemic or unless it has reasonable grounds to believe that those debts are unconnected to the pandemic.

In its decision, the court pointed out that the tenant’s rental arrears had started accruing from 2018, which was before the financial effects of the pandemic had started to be felt.

The tenant had argued that opting into the government’s furlough scheme evidenced that its business was not doing well financially due to impact of the pandemic, but the court rejected this argument. Opting into the furlough scheme is not a definitive indictor that a business is suffering financial loss connected to the pandemic. This is because, as Judge Baister pointed out, the furlough scheme can simply be utilised to protect a business from suffering any future financial loss associated to the pandemic- even if it has not yet suffered any.

The court also looked at whether the tenant would have continued to operate successfully should the pandemic not have occurred. The court did so by looking at the number of current and prospective contracts that the tenant company was engaged in. In doing so, the court determined that irrespective of the pandemic, the tenant’s business was unlikely to survive given that it was not engaged in enough work to generate adequate cash flow to keep it afloat.

What does this mean for tenants?

It is clear from this decision that a tenant that seeks to challenge a winding up petition by claiming that accrual of rental arrears is due to the impact of COVID-19 must be willing to provide sufficient evidence to satisfy such a claim. If they are not able to provide such evidence, it is likely that such a claim will be rejected.

For more information please contact Mina Kakkad at Mina.kakkad@haroldbenjamin.com or Anjali Derashri at Anjali.derashri@haroldbenjamin.com