Landlord’s attempt to avoid COVID restrictions for commercial tenant a costly exercise

Key Points

• During 2020 a number of restrictions were put in place on issuing Creditor’s Statutory Demands for Payment of Debt

• Regulations were introduced during 2020 in relation to restrictions on evictions of commercial tenants and renegotiation of rents for impacted tenants

• The Supreme Court recently examined how these two measures interact in relation to an application by a landlord to wind up a tenant in insolvency

During 2020, as part of the National Cabinet’s response to COVID-19, a number of measures were put in place to assist businesses to continue to trade including:

1. Temporarily increasing the threshold for issuing a creditor’s statutory demand for payment of debt against a corporation from $2,000 to $20,000 and the time limit for compliance from 21 days to 6 months; and
2. Introducing rental relief measures including a moratorium on evictions and an obligation on landlords to negotiate rental reductions with “impacted” tenants.

In the recent decision In the matter of Ryals Hotels Pty Ltd [2020] NSWSC 1906, the Supreme Court of New South Wales was required to examine the intersection of these measures in an application by a landlord, Zhaos Pty Ltd, to wind up its tenant, Ryals Hotels Pty Ltd, over unpaid rent.

In circumstances where the landlord did not seek to rely on a creditor’s statutory demand to establish a presumption of insolvency, the landlord instead relied on actual insolvency. The Court was therefore required to consider the evidence and whose burden it was to prove that the tenant was solvent or insolvent.

The Court also examined whether the application was an abuse of process and whether it should exercise its discretion to dismiss the application under s.467 Corporations Act 2001.

In dismissing the application, Black J held that although the tenant did dispute insolvency in its response, the landlord was still required to prove its own case. In those circumstances, Black J held that the landlord did not prove insolvency and the matter should be dismissed.

Further, although his Honour did not find that the application was an abuse of process where the landlord had refused to negotiate a rent reduction in good faith (as required by the rental relief measures), he did state that had the landlord been able to prove insolvency he still would have dismissed the application (or at least adjourned it for 12 months) under s.467 Corporations Act 2001.

In that regard, his Honour considered that the landlord was attempting to side-step the legislative intentions designed to protect companies adversely affected by the COVID-19 pandemic from being wound up.

Lessons

This decision has important lessons for not only landlords and tenants, but also other creditors and debtors.

For creditors, it is important to seek expert advice before taking action to wind up a debtor company. For debtors who are subject to an application to wind it up or are in receipt of a statutory demand, it should consider all defences and arguments available to it.

For example, although the temporary restrictions on issuing statutory demands have now been lifted, it remains open to a debtor to seek to have an application to wind it up dismissed under the Court’s discretionary powers if it can be shown its business was adversely impacted by the pandemic, even if it is technically insolvent.