In Action – The Corporate Insolvency & Governance Bill’s Restrictions on Winding-Up Proceedings

As I explained in a previous article, the Corporate Insolvency and Governance Bill (“CIG”) enacts temporary restrictions on winding-up proceedings. The recent decision of Insolvency and Company Court Judge Barber in Re A Company [2020] EWHC 1551 (Ch) (16 June 2020) shows us how the court will apply these provisions. 

Recap of the CIG provisions

1. The CIG provides that no petitions for the winding up of a company may be presented based on non-compliance with a statutory demand which was served during 1 March 2020 and 30 September 2020.
2. It is still possible to petition for the winding up of a company under section 123(1)(e) of the Insolvency Act 1986, namely that on the evidence before it, the court is satisfied that the company is unable to pay its debts as they fall due, without having first served a statutory demand during this time period.However, in respect of such petitions:
   1. a creditor may not present a petition unless the creditor has reasonable grounds for believing that coronavirus has not had a financial impact on the debtor company;
   2. where it appears to the court that coronavirus had a financial impact on the debtor company before the presentation of the petition;
   3. the court may wind the company up, only 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.

Re A Company [2020] EWHC 1551 (Ch)

Facts

The petition was presented on 1 May 2020 relied on section 123(1)(e), therefore the above provisions set out in the CIG came into play.

The debt in this case concerned an amount due for repayment under a loan agreement. The loan had become repayable on 22 January 2020 and the company had been unable to pay it.  An agreement had been reached between the company and the petitioner, that the petitioner would not call in the debt, provided that the company serviced interest payments on the loan twice a month.  These interest payments had started erratically and then stopped completely in May 2019.  At that point, if not before, the debt became repayable on demand.

There was evidence before the court, that the company was engaged in fundraising efforts, which came to a halt when the coronavirus pandemic hit.

The company applied for an injunction to prevent the petition from being advertised.

The decision – who has to evidence what?

ICC Judge Barber who held on the facts that petitioner had no knowledge of the company’s funding drive and the impact of Covid-19 on the fund raising efforts.  He therefore held that at the time of presenting the petition, the petitioner had reasonable grounds for believing that 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 presentation of the petition. That said, in light of the words used in the CIG, namely ‘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 has merely has to establish a prima facie case, rather than to prove the financial effect relied upon on the balance of probabilities.

As the company had shown that the company’s funding drive had been halted by the onset of the Covid-19  pandemic, the company had meet the threshold test of showing that coronavirus had a financial impact on the company.

As to satisfying the court that 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, ICC Judge Barber held that the burden of doing so, falls on the petitioner.

He held that on the evidence before him the court could not be satisfied that the company would have been unable to pay its debts as they fell due, even if coronavirus had not had a financial impact on the company. Therefore there was no real chance of a winding-up order being made. In the circumstances it was appropriate to grant an injunction restraining advertisement of the petition.

Conclusion

Whilst it is still possible to present petitions based on section 123(1)(e) of the Insolvency Act 1986, petitioner’s should proceed with caution, if they do so prior to 30 June 2020. 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 coronavirus, which should not be too difficult for most companies, may be a difficult one to discharge. The cost consequences of getting it wrong can be significant, should the company have the petition dismissed and/or obtain an injunction to restrain advertisement of the petition.

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.