The Corporate Insolvency and Governance Bill 2020 is already having an affect on winding up petitions, even before it has passed through Parliament and obtained Royal Assent. This is because, the court can take into account, when reaching a decision, the possibility of a change in the law.

In Re A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406, Morgan J handed down judgment on a without notice[1] application for an injunction restraining the presentation[2] of a winding up petition against a High Street retailer[3] (the ‘Company’). The would-be petitioning creditor (the ‘Creditor’) was the lessor of one retail unit of which the Company was the lessee. On 15.4.20, the Creditor served[4] a statutory demand founded on arrears of rent and service charge. Subsequently, the Creditor e-filed a petition seeking the winding up of the Company (but, as the Creditor had not yet paid the court fee, the petition had not yet been formally presented). Though not having seen the petition, Morgan J proceeded on the basis that ‘…the petition is based on the ground, within section 122(1)(f) of the Insolvency Act 1986 (“the 1986 Act”), that the company is unable to pay its debts. It seems likely that the creditor relies on section 123(1)(a) but it may be that it also relies on section 123(1)(e) or section 123(2) of the 1986 Act’ (paragraph 6).

While the Company applied for an injunction to restrain presentation of the petition on various grounds, Morgan J invited counsel to concentrate on one particular ground, that was, ‘…the significance of the provisions as to winding up contained in the Corporate Insolvency and Governance Bill 2020 (“the CIG Bill”)’ (paragraph 7).

Morgan J then set out the important parts to CIB Bill, contained within Schedule 10, at paragraphs 10 to 15 (inclusive).

’10. Paragraph 1 of schedule 10 provides that no petition for the winding up of a registered company may be presented under section 124 of the 1986 Act on or after 27 April 2020 on the ground specified in section 123(1)(a) (i.e. non-compliance with a statutory demand) where the demand is served during the relevant period which begins on 1 March 2020 and ends on 30 June 2020 (or one month after the coming into force of schedule 10, whichever is later). Paragraph 1 of schedule 10 states that it is to be regarded as having come into force on 27 April 2020.

11. Paragraph 2 provides for there to be restrictions on the presentation of winding up petitions. Paragraph 2(1) refers to petitions based on various grounds including the ground in section 123(1)(a) (non-compliance with a statutory demand) and paragraph 2(3) refers to a petition based on the ground in section 123(1)(e) (where it is proved that the company is cash flow insolvent) or section 123(2) (where it is provided that the company is balance sheet insolvent). Paragraph 2 is to be regarded as having come into force on 27 April 2020.

12. Both paragraph 2(1) and paragraph 2(3) require a creditor who seeks to present a petition pursuant to those provisions to satisfy a condition expressed in paragraph 2(2) or paragraph 2(4), as the case may be. The condition in paragraph 2(2) is expressed as follows:

“(2) The condition referred to in sub-paragraph (1) is that the creditor has reasonable grounds for believing that—

(a) coronavirus has not had a financial effect on the company, or

(b) the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.”

13. The condition in paragraph 2(4) is in slightly different terms but appears to have a similar effect to the condition in paragraph 2(2).

14. Paragraph 4 of schedule 10 deals with winding up petitions presented on or after 27 April 2020 but before the day on which schedule 10 comes into force. If the court to which the petition is presented without the condition in paragraph 2(2) or 2(4) being met, the court may make such order as it thinks appropriate to restore the position to what it would have been if the petition had not been presented.

15. Paragraph 5 of schedule 10 provides:

“5 (1) This paragraph applies where—

[(a)] a creditor presents a petition for the winding up of a registered company under section 124 of the 1986 Act in the relevant period,

[(b)] the company is deemed unable to pay its debts on a ground specified in section 123(1) or (2) of that Act, and

[(c)] it appears to the court that coronavirus had a financial effect on the company before the presentation of the petition.

[(2)] The court may wind the company up under section 122(1)(f) of the 1986 Act on a ground specified in section 123(1) (a) to (d) of that Act only if the court is satisfied that the facts by reference to which that ground applies would have arisen even if coronavirus had not had a financial effect on the company.

[(3)] The court may wind the company up under section 122(1)(f) of the 1986 Act on the ground specified in section 123(1) (e) or (2) of that Act only if the court is satisfied that the ground would apply even if coronavirus had not had a financial effect on the company.

[(4)] This paragraph is to be regarded as having come into force on 27 April 2020.”

[The subparagraph numbers for the CIG Bill paragraph 5 in the above passage contained errors; these have been corrected in square brackets above] 

Morgan J then said, at paragraph 16:

‘If these provisions of the CIG Bill are enacted in their present form, then their effect will be clear. The policy of these provisions in the CIG Bill is self-evident.’

Morgan J then considered:

(a) the current expectation of when the CIG Bill will receive Royal Assent, that is, ‘by the end of June 2020’ (paragraph 17); and

(b) the likelihood that Schedule 10 of the CIG Bill will be enacted in more or less its current form. Having been referred to a number of ministerial statements, Morgan J said ‘…I feel a high degree of confidence that schedule 10 will be enacted in more or less its current form and on the timetable referred to above’ (paragraph 17)

At paragraph 18, Morgan J said:

[5]‘[If] the petition were presented today or in the near future, it is most unlikely that it would be heard before the CIG Bill is enacted. As indicated earlier, once enacted, the relevant provisions are to be regarded as having come into force on 27 April 2020. This means that, on the hearing of the petition, a court must ask itself whether coronavirus has had a financial effect on the company before the presentation of the petition. If that is held to be the case, then the court can only wind up the company if it is satisfied that the facts on which the petition is based (under section 123(1) or (2)) would have arisen even if coronavirus had not had a financial effect on the company.'

The Company had filed a significant body of evidence on: (i) the effect the coronavirus had had on its finances; and (ii) ‘...whether the facts on which the petition would be based would have arisen even if coronavirus had not had a financial effect on the company.’ (paragraph 19). Morgan J found that, at its lowest, the Company had a strong case that the ‘…coronavirus has had a financial effect on the company before the presentation of the petition and, further, that the facts on which the petition would be based would not have arisen if coronavirus had not had a financial effect on the company.’ Consequently, Morgan J said, ‘This means that it appears that a petition to wind up the company would not result in the court making a winding up order.’ (paragraph 19), before recording that the pursuit of the petition‘…would nonetheless have a seriously damaging effect on the company.’ (paragraph 20); ‘It is in these circumstances that the company asks the court to restrain the presentation of a winding up petition....’ (paragraph 21).

Next, from the cases of Hill v C A Parsons [1972] Ch 305, Sparks v Holland [1997] 1 WLR 143 and Travelodge Ltd v Prime Aesthetics Ltd [2020] EWHC 1217 (Ch) ('Travelodge'), Morgan J derived the proposition that '...when the court is deciding whether to grant relief and, in particular, relief which involves the court controlling or managing its own processes, that (sic) it can take into account its assessment of the likelihood of a change in the law which would be relevant to its decision.’ (paragraph 24)

He continued, at paragraph 25:

‘In the present case, the creditor wishes to invoke the procedures of the court to present a winding up petition. On my assessment of the relevant circumstances, the creditor wishes to do so where it is improbable that the court will make a winding up order but where the existence of a presented petition will cause serious damage to the company. In those circumstances, I consider that, as a matter of law, I am able to take into account my assessment of the likelihood of the change in the law represented by schedule 10 to the CIG Bill.’

On the facts, Morgan J said, at paragraph 26:

‘Having taken that assessment into account, I consider that the court should control its own processes by restraining the presentation of this petition in the present circumstances. I do not see that the court is powerless to act to prevent its procedures being used otherwise than for the purpose of obtaining a winding up order (because it is improbable that such an order will be made) but for the purpose of, or at any rate with the effect of, causing serious damage to the company. I also consider that the grant of an injunction to restrain the presentation of the petition is powerfully supported by the clear policy objectives of the CIG Bill.’

Travelodge Ltd v Prime Aesthetics Ltd [2020] EWHC 1217 (Ch); 

In his judgment, Morgan J was keen to raise awareness of the Travelodge decision, a decision of Birss J, noting that because it did not appear available on the usual websites nor on bailii.org, the decision was not well known[6]. In Travelodge, Birss J ‘…reached essentially the same conclusion…’ (paragraph 26) even ‘…before the publication of the CIG Bill and was based on what had been said in ministerial statements.’ The case before Morgan J was 'more clear' as the CIB Bill: (i) had been published; and (ii) was '...being actively and speedily considered by Parliament' (paragraph 26). This meant that Morgan J could ‘…form a confident assessment as to when it will receive Royal Assent.’ (paragraph 26). 

Re A Company (Injunction to Restrain Presentation of Petition) stands on its own, but the existence of Travelodge reinforces the 'attitude' (paragraph 27) the Court has in this area. 

UPDATE: Re A Company [2020] EWHC 1551 (Ch)

A further case in this area has been handed down: Re A Company [2020] EWHC 1551 (Ch), a decision of ICCJ Barber. This Re A Company was handed down on 16.6.20 (so after Morgan J in Re A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406, handed down on 2.6.20 and Birss J in Travelodge on 6.5.20). Given the overlap, it is appropriate to note this in an update.  

SIMON HILL © 2020

BARRISTER

33 BEDFORD ROW

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