Successful Winding up petition defence for commercial rent arrears

The High Court has refused a winding-up petition for a company that had not paid commercial rent in over a year on the basis there was a bona fide dispute over the terms of the lease in Lestown Property Limited [2021] IEHC 513. Due to the impact of the Covid-19 pandemic, the company argued that it was not obligated to pay rent under the suspension provision. The court further stated that winding up the corporation would be inappropriate because the debt was “entirely attributable” to ongoing restrictions imposed by the Minister of Health. Although the case was heard in the Irish courts, the guidance provided is useful and such successful arguments can be deployed in the England and Wales jurisdiction.

We are leading experts specialising in insolvency proceedings. Our experienced City of London solicitors and barristers regularly assist companies facing a winding up petition; individuals served a statutory demand; or creditors owed money and considering issuing a winding up petition. 

The Facts

Lestown Property Limited, a corporation owned by the petitioner, operated a Leisureplex in the Charlestown Shopping Centre under a 25-year lease. The business paid its rent until April 2020, after which it stopped paying.

The petitioner served a formal demand for unpaid rent under section 570 of the Companies Act 2014 in October 2020, seeking €153,000. The petitioner alleged that €338,000 in overdue rent was owing at the time of the application in February 2021.

Since April 2020, the company has been legally obliged to shut down for considerable periods of time, according to the petitioner. The length of those intervals, the extent to which the firm actually opened, and the amount to which the cinema’s closure impacted the Leisureplex’s ability to open were all disputed.

Moreover, the business argued that the lease arrangement exempted it from paying any rent. The contract had a rent suspension clause that said the company would not have to pay rent if the premises were destroyed or damaged due to an insured risk if the service charge and insurance payments were up to date.

The insurance policy in question provided coverage for property loss, destruction, and damage. A particular provision was made to cover the loss of access due to property damage. The term “damage” was further expanded to include the closure of the premises on the order or advice of municipal or governmental authorities under a Notifiable Diseases provision. It was contended that the insured risk (e.g., an outbreak on the premises) had not been proved and that the property’s forced closure did not render it unfit for use.

The corporation had filed the €153,000 statutory demand with its counsel in order to verify its solvency. This did not satisfy the petitioner, who claimed that the company’s books revealed no fixed assets and no cash in the bank accounts. It was also claimed that the corporation admitted to being in serious financial trouble as a result of correspondence.

High Court Judgment

Ms Justice Nuala Butler, who delivered the decision in the case, refused to declare the corporation bankrupt. She cited Truck and Machinery Sales Limited v. Marubeni Komatsu Limited [1996] 1 IR 12 to argue that a winding up order is not a legal way to collect on a legitimately disputed debt.

The court stated that the standard for determining whether a bonafide dispute existed was necessarily lower than the standard for determining whether the rent suspension provisions applied. Furthermore, the court stated that merely proving that the corporation was unable to pay its debt did not imply that a winding-up order would be issued. According to the judge, the court retains the overriding power to deny the application. The court first ruled that Covid-19 had clearly impacted all Irish enterprises, and hence rejected the argument that the correspondence proved the company was insolvent.

Additionally, the court then decided that the parties had a genuine disagreement about how the suspension clause should be applied. It was unnecessary for the court to decide whether either party was correct in their arguments. Instead, the court was convinced that there was a genuine dispute about the interpretation of the clause and the insurance policy based on the parties’ submissions.

The court said: “I would be very reluctant to make an order winding up the company in consequence of the non-payment of a debt where the circumstances of that debt are entirely attributable to ongoing restrictions of this nature and are arguably the subject of a specific clause in the lease which would suspend the disputed liability.”Furthermore, any other tenant would be subject to the same restrictions as the corporation, therefore the premises could not be readily re-let to another tenant.

Finally, the court determined that there was a bona fide dispute regarding the rent suspension clause. Accordingly, the court refused the application to wind the company up.

Summary of the winding up process

The presentation of a winding up petition to the court is the first stage of the winding up (or, as it is also known, compulsory liquidation) process. It means that the petitioner is attempting to have the company compulsorily put into liquidation by the court.

Upon winding up all the assets of the company are collected and distributed amongst creditors. The company will continue to carry on business and can enter and complete transactions but only for the purpose of winding up its’ affairs in the interest of creditors and shareholders.

However any other transactions entered into will be void and no contracts can be executed by the company. As a whole from the moment the company is wound up the company is stopped as a going concern.

The reasons why a person might seek to have a company wound up are broad ranging. The most common reason is that the company has become unable to pay debts owing to its creditors (see section 122(1)(f), Insolvency Act 1986 (1986 Act)).

How can a winding up petition be opposed?

Where the grounds to challenge the petition exist it would be sensible to oppose the winding up petition.  A winding up petition may be challenged by a company on the following grounds:

1. The debt alleged in the demand to be owing is genuinely disputed on substantial grounds by the company.
2. The company has a genuine right of set-off against the creditor which exceeds the amount claimed in the demand.
3. In certain other limited circumstances (for example such as Jurisdiction, Company likely to become insolvent, Technical or procedural error or Delay).

The procedure to oppose a winding up petition is to file a witness statement in opposition in court not less than five business days before the date of the hearing of the petition. A copy of the evidence must also be sent to the petitioning creditor as soon as reasonably practicable.

The company is entitled to appear at the hearing of the petition and to oppose the making of a winding up order. It is usual for a company to instruct solicitors and/or counsel to appear on its behalf at the hearing.

If the company chooses not to instruct legal representatives, any director is entitled to appear at the hearing on the company’s behalf, but other agents (such as the company’s accountant) cannot.

Instruct Specialist Insolvency Lawyers

We provide a no cost initial case review to establish whether or not we can help you. We are a specialist City of London law firm made up of Solicitors & Barristers and based in the Middle Temple Inn of Court adjacent to the Royal Courts of Justice.  We are experts in dealing with matters surrounding insolvency in particular issues.  Our team have unparalleled experience at serving statutory demands, negotiating with debtors/creditors, setting aside statutory demands and both issuing and defending winding up petitions vigorously at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction under the Insolvency Rules.