As the Covid-19 pandemic continues, various temporary insolvency measures originally set out in the Corporate Insolvency and Governance Act 2020 (CIGA), have been extended further. In addition, liability for wrongful trading has, once again, been suspended.
Extension of Temporary Measures
Now extended until 30 March 2021:
- The prohibition on presenting winding-up petitions based on statutory demands.
- The restriction on presenting winding-up petitions based on the grounds that a company is unable to pay its debts as they fall due, unless the creditor can establish that the inability to pay is not linked to the Covid-19 pandemic.
Other Temporary Measures had already extended to 30 March 2021, namely:
- The temporary exclusion of small suppliers from the restrictions on terminating supply contracts for insolvency.
- Relaxed entry requirements for the new statutory moratorium under Part A1 of the Insolvency Act 1986 introduced by CIGA. These temporary relaxations include a waiver of the requirement that a company seeking a Part A1 moratorium has to make a court application if they are subject to a winding-up petition; and a waiver of the requirement that a company seeking a Part A1 moratorium has not been subject to an insolvency procedure or a Part A1 moratorium in the preceding 12 months.
Restriction on the Presentaiton of Winding Up Petitions
The CIGA provisions
Under the current extended restrictions, a winding-up petition based on the grounds that a company cannot pay its debts as they fall due, may only be presented if the creditor has reasonable grounds for believing that:
(a) Coronavirus has not had a financial affect on the company, or
(b) the company would have been unable to pay its debts as they fell due, even if Coronavirus had not had a financial affect on the company.
Where it appears to the court that Coronavirus had a financial impact on the company, it may only proceed in making a winding-up order, if the court is satisfied that the company would have been unable to pay its debts as they fall due, even if coronavirus had not had a financial effect on the company.
How the court interprets the provisions
In Re A Company [2020] EWHC 1551 (Ch), ICC Judge Barber held that at the time of presenting the petition, the creditor had reasonable grounds to believe that the Coronavirus had not had a financial impact on the company.
He then held that it is the company, who has the evidential burden of showing that Coronavirus had a financial impact on the company, before a presentation of the petition. That said, in light of the words used in CIGA, namely if ‘it appears’ to the court that Coronavirus had a financial impact, ICC Judge Barber concluded that this was intended to be a low threshold and that the company only needs to establish a prima facia case, rather than to prove the financial effect relied upon on the balance of probabilities.
Once the company has shown that Coronavirus has had a financial impact on the company, it then falls to the petitioner to satisfy the court that the company would have been unable to pay its debts as they fell due, even if Coronavirus had not had a financial effect on the company.
In summary, the burden of satisfying the Court that the company would have been unable to pay its debts regardless, once the company has shown a financial impact of the Coronavirus, falls on the petitioner.
Petitions now subject to a pre-trial review
To further protect companies from the effect that the mere presentation of a winding-up petition has, under a temporary Practice Direction, winding-up petitions are now subjected to a pre-trial review, during which the court assesses the likelihood of the petition succeeding given the Covid-19 restrictions on petitions set out in CIGA (“Coronavirus Test”). Unless and until a petition successfully passes the pre-trial review, it will be kept off the winding-up register and the relevant court records are private.
If a petition passes the pre-trial review, it will then either be listed for a preliminary hearing at which the Coronavirus Test will be applied or, if the petition is uncontested and the Coronavirus Test is not likely to be fatal the petition, a full hearing in the winding-up list.
Wrongful Trading
Wrongful trading refers to the liability of a director of a company which continues to trade at a time when its directors (should have) concluded that there is no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration. If a company continues to trade after this moment in time, then the directors are under an obligation to take every step possible to minimise losses to creditors. If they fail to take these steps, then directors can be ordered by the court to personally contribute to the company’s assets.
CIGA suspended this personal liability from 1 March 2020 to 30 September 2020. This suspension has now been reinstated from 26 November 2020 to 30 April 2021.
This means that courts, when considering wrongful trading actions against directors, can only deal with claims that wrongful trading which took place a period before 1 March 2020 or between 1 October to 25 November 2020. To assess claims of wrongful trading between 1 October 2020 and 25 November 2020 is likely to be difficult in practice, and this may have the effect in insolvency practitioners not pursuing any wrongful trading actions during the period.
Having said this, it is important to note that the suspension only applies to the directors liability to make a contribution to the company’s assets, if wrongful trading as taken place. If wrongful trading has occurred during the suspension period, this can still be used as grounds to justify a director’s disqualification.
Furthermore, the suspension of the wrongful trading liability, does not have an impact on directors’ statutory and fiduciary duties, including a duty under Section 172 of the Companies Act 2006 to take creditors’ interests into consideration at a time when a company is close to insolvency.
It therefore remains paramount for directors to be able to justify the decisions they make about continued trading, if trading takes place to the detriment of its creditors. Directors who are concerned about a financial position of their company should seek early legal advice and guidance from their accountants on the balance sheet position and cash flow solvency of their company. Where the directors fear that insolvent liquidation or administration cannot be avoided or that it is likely that this cannot be avoided, they should seek urgent advice from an insolvency practitioner.
Moving Forward
Petra van Dijk is an Associate Solicitor in Spratt Endicott’s Dispute Resolution practice, specialising in contentious and non-contentious insolvency. Contact Petra on pvandijk@se-solicitors.co.uk.
*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation. This article is accurate at time of publication on 7th of January 2021.
