In recent articles, we have looked at the implications of Covid-19 on existing Landlord and Tenant relationships. In many cases, Landlords and Tenants have voluntarily adapted their respective positions in order to aid the survival of their businesses throughout the pandemic. In other situations, the relationship has broken down and there have been attempts to deal with the matter via the Courts.
One such option is the ability under Section 569 of the Companies Act 2014 for a petitioner to ask the High Court to make an order winding up a Company if it is unable to pay its debts. This very issue arose in the recent High Court decision of Butler J. in the Matter of Lestown Property Limited and In the Matter of the Companies Act 2014. In this case, Butler J refused a winding up petition brought against a Tenant Company (the “Tenant”) by its Landlord for unpaid rent highlighting the Court’s reluctance to make an order winding up a Company for the non-payment of a debt, where the circumstances are attributable in part to Covid-19 restrictions.
The dispute arose over non-payment of rent by the Tenant who operated a Leisureplex in Charlestown Shopping Centre (the “Premises”) pursuant to a 25-year lease entered in to on 25 November 2015 (the “Lease”). The Tenant had not paid any rent or service charge that had become due under the Lease since the introduction of restrictions on public health grounds on 8 April 2020. The restrictions due to the Covid-19 pandemic required that the Tenant remained closed for significant periods of time or placed a limit on the number of people that could be present at the Premises. It was complicated further by virtue of the fact that the Premises was accessed via an adjoining Cinema, which also remained closed.
It was claimed by the Petitioning Landlord that €338,572 was owed in unpaid sums, although at the date of formal demand, the amount was only €153,233.75. While the Tenant acknowledged it had not paid the rent and service charge, it relied on certain rent and service charge suspension provisions in the Lease. The Court did not have to reach a definitive conclusion on this particular argument in order to determine if it would grant the order.
The Landlord petitioned the Court to grant the winding up order because the Tenant was unable to pay its debts. The Tenant argued that because of established case law, where there is a bona fide dispute regarding liability for the debt claimed, the Court should not make an order winding up the company.
The Court held that its task was firstly to ascertain whether there was a bona fide and substantial dispute as to the company’s liability for rent and service charge and secondly, could the Petitioner satisfy one of the grounds under the relevant provisions in the Companies Act 2014 to wind up the Company. The Court further noted that it always had an overriding discretion to refuse a Petitioner’s application.
On the facts of this case, the Court determined that there was a bona fide dispute on substantial grounds regarding liability for the debt claimed. Butler J noted that when these matters are finally determined, the Tenant may or may not succeed in establishing that it does not owe the sums claimed by the Landlord. However, there was sufficient merit in the arguments raised by the Tenant, and she rejected the petition brought by the Landlord. She was not prepared to deem the Tenant unable to pay its debts.
Interestingly, Butler J in her judgment stated even if she was satisfied that the Tenant should be deemed unable to pay its debts, the Court would still have discretion as to whether a winding up order should be made. In particular, she was influenced by the fact that the Tenant had lodged the amount of the statutory demand with its solicitors. She believed that this indicated that that amount of money was available to pay the debt. She noted that the debt remained unpaid, not because the Tenant did not have the resources, but because it disputed its liability to pay.
She was heavily influenced by the fact that the events leading to the dispute were outside of the control of both parties. Butler J acknowledged the economic impact on both businesses due to the pandemic and said that winding up a company “without affording it the opportunity to rely on the terms of its existing contracts even where the meaning and impact of those terms in light of the legal restrictions is disputed, is a drastic solution.”
Importantly, the Court made it clear that it was not in its determination, attempting to predict how liability for the economic consequences be dealt with. In particular, she noted that it was not as straightforward as saying that if the Tenant was wound up, that the Landlord would be able to relet the Premises to another tenant. Any other tenant taking possession would face exactly the same restrictions. In particular, she took in to account the fact that at no stage prior to the pandemic had there been a suggestion that the Tenant had ever been in arrears of the sums due under the Lease, nor was it an undesirable Tenant.
Now that the economy is reopening, it will be interesting to see how the Courts will deal with a Tenant who continues to withhold rent and other payments due under their Leases. One can certainly say that we will see greater enthusiasm on the part of Landlords to bring arrangements with their Tenants back in to order as soon as they possibly can. However, the Lestown case is a demonstration of the Court’s reluctance to allow petitions for the winding up of a company to be used as a debt collection mechanism. Landlords would be well advised to consider a range of options before invoking Section 569 of the Companies Act 2014 in relation to a tenant who has fallen into arrears of rent during the currency of the public health restrictions and/or lockdowns.