High Court Refuses Winding Up Petition against Company for Unpaid Rent
The High Court recently refused a winding up petition brought against a company by its landlord for unpaid rent. The High Court found that a bona fide dispute existed as to whether a rent suspension clause in the lease applied where the premises were closed due to COVID-19 public health restrictions. The Court remarked on the challenges faced by many businesses due to the COVID-19 pandemic and was sympathetic about its unprecedented economic effects.

 

Overview 

The High Court (Court) recently refused a winding up petition brought against Lestown Property Limited (Company) for unpaid rent.  The Court was satisfied that a bona fide dispute existed as to the Company's liability for the rent.  The Company acknowledged the rent was not paid.  However, it disputed its liability to pay rent during a time when COVID-19 restrictions were in place, relying on a rent suspension clause in its lease with the Petitioning landlord (Petitioner).   

The Company operated an indoor-games and playing facility at a Dublin shopping centre under a 25-year lease. The company stopped paying rent from April 2020 when the COVID-19 restrictions were introduced. By the time the application for the winding up was heard at the end of April 2021, rent had not been paid by the Company for a full year. It was claimed  almost €340,0000 was owed in unpaid rent.

The Court determined there was a genuine dispute regarding liability for the debt claimed and rejected the petition brought by the landlord. The Court appeared to be influenced by the extraordinary effects of the COVID-19 pandemic and how the events leading to non-payment arose from events outside the control of both parties. 

Winding Up Petition

The Petitioner brought the application to wind up the Company under section 569(1) of the Companies Act 2014 (CA 2014). Section 569(1)(d) states that a company may be wound up by the Court if the company is unable to pay its debts. The Petitioner had previously served a formal 21-day demand for unpaid rent pursuant to section 570 of the CA 2014, which remained unsatisfied.  However, the Company lodged the sum claimed under the formal demand with its Solicitors.  

Rent Suspension Clause

The Company argued that it did not have to pay any rent from April 2020 in reliance on a rent suspension clause in its lease agreement. The clause provided that if the Company remained up to date on the service charge and insurance payments, it would not have to pay rent if the premises were destroyed or damaged from an insured risk.

The Petitioners insurance policy covered loss, damage or destruction of the premises and its contents. The insurance policy also included cover against the occurrence of a notifiable disease and "damage" under this clause included the closure of the premises on order or advice of local or governmental authority as a result of an outbreak of infectious disease at the premises.

The Company relied on these clauses to assert that the outbreak of a notifiable disease was an insured risk and the premises had been damaged and rendered unfit for use or occupation as a result of the COVID-19 pandemic.

Bona Fide Dispute

Ms Justice Butler stated that where there is a bona fide dispute regarding liability for a debt claimed, the Court should not make an order winding up the company. Butler J found that the Court did not have to determine whether the rent suspensions provisions actually applied; the test for a bona fide dispute is a lower threshold. Ultimately, the Court was satisfied that there was a bona fide dispute over the interpretation of the rent suspension clause. This was sufficient to stop the Court from making an order winding up the company. 

The Court also made clear that even if it determined there was not a bona fide dispute, it would still have the ultimate discretion in deciding whether to wind up the company. The Court pointed to the COVID-19 pandemic in this regard, noting that the unprecedented events which led to the non-payment of rent by the Company and the consequent dispute between the parties arose because of events outside their control. The Court specifically referred to the detrimental economic impact of the public health restrictions on businesses, and commented that winding-up a company without affording it an opportunity to rely on clauses in its contracts would be drastic. 

Important Takeaways from the Judgment

The judgment was not a determination that the tenant was entitled to suspend the payment of rent due to the closure of the premises as a result of the COVID 19 public health restrictions. Rather it is a reminder that where there is a bona fide dispute regarding the underlying debt that plenary proceedings would  be a more appropriate route.

Furthermore, the judgment is also a reminder that the Court has an overriding discretion,  depending on the circumstances of the case, to refuse an application to wind-up a company and that the impact of the COVID 19 public health restrictions on a company will be a material, although not necessarily determinative, consideration for the Court in exercising that discretion.

 

 

Contributed by Cliona Walsh

 

Key Contacts

Fergus Doorly Partner

Ruairi Rynn Partner

Alice O'Connor Senior Associate