Winding Up Companies - Coronavirus Test - Some Authorities (updated)

Update: This article is in respect to creditors winding up petitions presented on or before 30 September 2021. For creditor winding up petitions presented on or after 1 October 2021, see this article.

The provisions of Schedule 10 to Corporate Insolvency and Governance Act 2020 ("the 2020 Act”), along with the accompanying Insolvency Practice Direction, have significantly changed the law on creditors winding up petitions. However, there has been a paucity of reported cases on Schedule 10 and the Insolvency Practice Direction, to guide the practitioner through this new territory. Re A Company [2020] EWHC 1551 (Ch); [2020] BCC 773 has been the main authority, a decision of ICC Judge Barber.

To this, there can now be added five further authorities:

(1) PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch) (‘PGH Investments’), a decision of Deputy ICC Judge Passfield, arising from a hearing on 1.3.21, with the decision handed down on 17.3.21;

(2) Newman v Templar Corp Ltd [2020] EWHC 3740 (Ch) ('Newman'), a decision of Deputy ICC Judge Agnello QC, handed down on 2.12.20;

(3) Re A Company [2021] EWHC 2289 (Ch), a decision of Judge Kelly sitting as a Judge of the High Court on 11.8.21;

(4) Doran v County Rentals Ltd (t/a Hunters) [2021] EWHC 3372 (Ch), a decision of His Honour Judge Cadwallader (Sitting As A Judge Of The High Court) handed down on 6.10.21; and

(5) Re A Company (Preliminary Hearing under Schedule 10 to the Corporate Insolvency and Governance Act 2020) (also known as Petitioner v Company) [2021] EWHC 2905 (Ch), a decision of ICCJ Barber handed down on 11.11.21.

There is a further case (so a sixth case), A v B [2021] 3 WLUK 312, a decision of Deputy ICCJ Baister, handed down on 18.3.21, however there is only a summary of the case available.

(1) PGH Investments

This latest authority is illuminating though much of what is said is obiter

In PGH Investments, the Petitioner Mr Ewing (the ‘Petitioner’) presented a creditors winding up petition (the 'Petition’) against PGH Investments Ltd (the 'Company’) on 8.9.20. The Petition was founded upon an alleged debt of £825,000 (the ‘Alleged Debt’) said to be due from the Company to the Petitioner under a guarantee/indemnity given by the Company to the Petitioner, guaranteeing/indemnifying the Petitioner in the event that, in essence, Mr Neate, the principal debtor/buyer failed to fulfil his obligations under a Share Purchase and Loan Assignment Agreement (‘the Agreement’).

On 25.9.20, the Company issued an application (‘the Application’) ‘… seeking either the dismissal of the Petition or an order restraining the Petitioner from advertising it.' (paragraph 30)[1]

Seemingly, the Company put forward 3 arguments in support of the Application:
(1) the Company did not owe the Petitioner the Alleged Debt; alternatively, 
(2) the Company could pray in aid paragraph 5(3) of Schedule 10 to the 2020 Act; alternatively,
(3) the Petition was an abuse of process as it was presented for a collateral purpose.

The existence of the Application is important to note procedurally. Normally, under the Insolvency Practice Direction, a Petition (i.e. one not subject to an application for dismissal/restraint) would be listed for a non-attendance pre-trial review, whereupon, depending on the determination by the Court under paragraph 7.1 to the Insolvency Practice Direction, the Petition might be listed for a Preliminary Hearing to determine, pursuant to paragraph 8.1 of the Insolvency Practice Direction, the likelihood of the Coronavirus Test (see below) being satisfied at a full hearing.

In PGH Investments though, procedurally the case took a different path. The Deputy ICC Judge noted, at paragraph 22:

‘At the first hearing of the Application, on 8 October 2020, ICC Judge Mullen vacated the non attendance pre-trial review listed on 13 October 2020 (at which the court would otherwise have given directions for a preliminary hearing in accordance with para.7.1(2) of the CIGA PD), gave directions for the filing and service of evidence in response to the Application and listed the matter for a hearing on 1 March 2021…’

And later, at paragraph 36:

‘…I note that ICC Judge Mullen listed the present hearing specifically for the purposes of considering the Company's claim that the Alleged Debt is genuinely disputed on substantial grounds.’

Accordingly, the 1.3.21 hearing before Deputy ICC Judge Passfield was not simply a Preliminary Hearing listed under paragraph 7.1 to the Insolvency Practice Direction. It was a hearing to determine the Application for: (1) dismissal of the Petition; and, alternatively, (2) to restrain advertisement (i.e. notice) of the Petition.

PGH Investments - First Argument - the Company did not owe the Petitioner the Alleged Debt
Addressing the Application, the Deputy ICC Judge considered the first of the Company's arguments - that the Petitioner was not the Company's creditor, at least not to the required level of certainty for the companies court - that is: ‘…whether or not the Company has genuine and substantial grounds for disputing the Alleged Debt…’ (paragraph 37). The Court then determined this issue, concluding at paragraph 63 that:

…on a proper construction of the Agreement, the Company is not liable to pay the Alleged Debt to the Petitioner and, accordingly, the Petition should be dismissed.’

Having made that finding, the Court did not need to go on to consider the rest of the Application, in particular, the other 2 arguments. The Deputy ICC Judge expressly recognised this, when he said, at paragraph 64:

‘In light of my finding that the Company is not liable to pay the Admitted (sic) Debt, it is not strictly necessary for me to go on to consider the coronavirus test in para.5(3) of Schedule 10 to the 2020 Act.’

He did though go on to consider the other 2 arguments raised in support of the Application. Consequently, though it is interesting and illuminating to consider how the Deputy ICC Judge dealt with the other 2 arguments, strictly speaking, the rest of the judgment is obiter and so of only persuasive authority.

PGH Investments - Second Argument - Coronavirus Test
Building on his exposition of the applicable legal framework at paragraphs 26 to 29 inclusive[2], the Deputy ICC Judge reminded himself that the ‘the evidential burden is on the Company to establish a prima facie case that coronavirus had a “financial effect" on the Company before the presentation of the Petition, that is to say the Company's financial position has worsened in consequence of, or for reasons relating to, coronavirus.’ (Paragraph 64). 

On this, the Judge found that, though a ‘low threshold’, the Company failed to met this evidential burden. He found that:

(1) ‘Financial effect’ within paragraph 5(1)(c) of Schedule 10 could be indirect[3] financial effect. Depending on the evidence, it was possible for the principal debtor Mr Neate’s financial position (his ability to secure funding to buy shares held by the Petitioner) to worsening due to the coronavirus, and for this to have a qualifying 'financial effect' on the Company/guarantor’s financial position;
(2) However, the Company had ‘…not produced adequate evidence to demonstrate that Mr Neate was unable to find a buyer for the Petitioner's shares because of the coronavirus pandemic.’ (Paragraph 72). The sole relevant email from Mr Neate to the Petitioner did not indicate ‘…that any difficulties which Mr Neate had in securing funding for the purchase of the Petitioner's shares were caused by coronavirus.’ (Paragraph 72);

Consequently, the Deputy ICC Judge concluded that:

(1) it did not appear to him that the ‘…coronavirus had a financial effect on the Company before the presentation of the Petition…’ ; and
(2) ‘…therefore the restriction on making a winding up order in para.5(3) of Schedule 10 to the 2020 Act does not apply.’

As a result, the second argument was not a ground for dismissing the Petition. 

The Deputy ICC Judge then dealt with a further alternative. That was, if he was wrong in his conclusion that the coronavirus had not had a financial effect on the Company before the presentation of the Petition, what would he then have decided.  Moving to consider this, he, in essence, posed the paragraph 5(3) coronavirus test. He said ‘the evidential burden will be on the Petitioner to demonstrate that the Company would be unable to pay its debts as they fall due even if coronavirus had not had a financial effect on the company.’ 

Pausing there. One can say that the Deputy ICC Judge had so far correctly approached the Application to dismiss the Petition that was before him, addressing in order the 3 arguments before him (at least to the extent of dealing with the first argument then the second argument). As to the second argument (on the counterfactual basis of: if I am wrong about there being genuine and substantial grounds for disputing the Alleged Debt), he had correctly asked himself:
(a) whether or not the paragraph 5(1) of Schedule 10 provisions were met, and then
(b) whether or not paragraph 5(3) of Schedule 10 was satisfied. 

However, the Deputy ICC Judge then stated that in fact, at this stage, his task was to determine an ‘anterior question’ (paragraph 74) - that of ‘…whether it is likely that the court will be able to make a winding up order against the Company, which must be determined with regard to the restriction in para.5(3) of Schedule 10 to the 2020 Act.’ [‘likely’ being emphasised in the original judgment by being in italics].

This requires some reflection:

(1) seemingly the 1.3.21 hearing was not listed as a Preliminary Hearing, where the anterior question is the question prescribed by paragraph 8 of the Insolvency Practice Direction for Preliminary Hearings. It was listed for the determination of the Application to dismiss the Petition (alternatively, an injunction to restrain advertisement)

(2) In determining whether to accede to the Application and dismiss the Petition, the Court could, if it considered the Petition doomed to failure, consider and dismiss a Petition on the basis it would be oppressive to allow such a Petition to continue to a full hearing (after damaging advertisement), like in Re A Company [2020] EWHC 1551 (Ch); [2020] BCC 773);

(3) in determining whether it was doomed to failure, the Deputy ICC Judge could ask himself what would be the outcome at a full hearing, but also, importantly, what would be the outcome at a Preliminary Hearing (since the Petition could still be listed for a Preliminary Hearing). This would be the ‘anterior question’ and consistent with this, the Deputy ICC Judge did ask himself and did answer, this 'anterior question'. 

However this approach is framed, the determination of the Court on the Coronavirus Test was emphatic, answering in a sense, both the main paragraph 5(3) question and the 'anterior question'. This is because the Deputy ICC Judge said, at paragraph 78:

‘…if I had been persuaded that coronavirus had a financial effect on the Company before the presentation of the Petition (which, for the reasons set out above, I am not), I would not have been satisfied that there was any likelihood of the Petitioner discharging the evidential burden of satisfying the court that the Company would have been unable to pay its debts as they fall due in any event.’

In other words, the Court found there was no chance that the paragraph 5(3) restriction on making winding up orders would not apply at a full hearing. Consequently, it was certain that the restriction would apply and, given the Company could not then be made subject to a winding up order, the Petition should just be dismissed.

PGH Investments - Third Argument - Collateral Purpose
The third argument was collateral purpose. On this, the Deputy ICC Judge held that, if contrary to his decision, the Alleged Debt was owed by the Company to the Petitioner, then he would not have dismissed the Petition on the basis it was presented for a collateral purpose. This was because, after referring to Maud v Aabar Block SARL [2015] EWHC 1626 (Ch); [2015] BPIR 845 and Rose J’s observations[4] abuse of process situations, the Deputy ICC Judge accepted the submission that:

(1) the Petitioner did ‘…genuinely want to obtain a winding up order against the Company, both because it is insolvent and because the transfer away of its only assets immediately after the presentation of the Petition…’ (paragraph 82); and also

(2) since the Petitioner was only an unsecured creditor of the Company (i.e. he held no other relevant relationships with the Company or its assets), it was ‘…logically absurd to suggest that the Petitioner…’ was ‘…not acting in the interests of his class of creditors or that the success of the Petition will operate to the disadvantage of those creditors.’ (Paragraph 82).

PGH Investments - Conclusion

On the Deputy ICC Judge's primary findings, the Petition was dismissed on the sole basis that the Company did not owe the Petitioner the Alleged Debt (first argument). He did not dismiss the Petition on either the second argument or third argument.

(2) Newman v Templar Corp Ltd

This case provides only limited insight. It re-affirms that, at the Preliminary Hearing, (1) the threshold for showing the company's woes were caused by the coronavirus is a 'low threshold'; and (2) the burden is on the company to show this. On the facts, it was common ground that the company was insolvent. The judge, Deputy ICC Judge Agnello QC, found that '...this Company is hopelessly insolvent. That was the position before coronavirus, that its position was one of hopeless insolvency.' (paragraph 2). The petitoning creditor, an employee, had not been paid for months. The company's evidence was that 'the reason as to why these sums were not paid to the employee (the petitioning creditor ) is because an investment which was due to be paid to the Company by its investor, a Mr Ehab, was not received.' (paragraph 7). It was said that Mr Ehab had not been able to travel to Switzerland to complete formalities for the distribution of the funds, as a direct consequence of COVID 19 international travel restrictions coming in in March 2020. However, there was 'a litany of broken promises as to when this investment will arrive' (paragraph 8) stretching back to September 2019. Promises made in September 2019, when apparently an investment agreement was signed, that the money would be paid 'within weeks' (paragraph 8). There were also promises in November 2019 which never materialised. 

Deputy ICC Judge Agnello QC said, from paragraph 12 to 18:

'I am invited to find even on a low threshold prima facie case that there was sufficient evidence that the reason for the nonpayment, the reason for the failure to invest was by reason of coronavirus.

In my judgment, I do not consider that the evidence before me sets out the prima facie case. There is absolutely nothing which has been exhibited to [company's witness'] witness statement which actually indicates that is the case. There is no investment agreement. There are no emails with Mr Ehab. There is no explanation from Mr Ehab as to why he could not travel. All I have is [company's witness'] witness statement, which I need to set against the background of broken promise after broken promise of investment from the same investor.

In my judgment, what we have here is an unwilling investor. It is difficult to see any evidence that supports that such an unwilling investor was willing suddenly to invest in March and then it could not happen because he could not travel.

I also question the evidence saying it had to be done face to face. There is no evidence to back that up beyond [the company's witness'] say-so. Bearing in mind the history of the broken promises from this same investor, I am not satisfied that the evidence actually establishes a prima facie case. It is weak. It does not go any higher than simply being, this is what happened, but the evidence against it is, in my judgment, pretty compelling, demonstrating a litany of broken promises such that when one reaches March, there could be in my judgment no confidence or evidence that any investment would occur there as no investment had occurred at earlier dates when promised.

The threshold is low, but this case, and I agree with [counsel for the petitioner], is different from that before ICC Judge Barber. ICC Judge Barber had not only documents, but the evidence was certainly, when one reads her judgment, more detailed. Here, one has numerous promises that the money would come, would come, would come. It does not come. So it cannot be said that the reason the money did not come in March was due to the pandemic. There is no evidence to support that any money was due to arrive in March bearing in mind the litany of broken promises from the same investor.

Then suddenly the evidence says, "But it was going to come in March." There is no evidence to support why after so many broken promises March was going to be the magical moment, and in fact by July when [the company's witness] says, "He has now travelled and sorted it all out" at the time the petition was issued payment had not been made.

Whilst it is not part of my case on the basis that I need to look at matters before the petition was issued, even today no payment has been made. In all those circumstances, I am satisfied that this is a case where the Company has failed the low threshold of showing that the coronavirus has a financial effect. The Company is hopelessly insolvent, the evidence does not satisfy me that coronavirus has a financial effect and in all the circumstances this matter should continue for a hearing of the winding up petition itself.'

(3) Re A Company [2021] EWHC 2289 (Ch)

In this case, the judge applied ICCJ Barber's judgment on the Coronavirus Test at a Preliminary Hearing, rather than set out any new propositions of law.

(1) Limb 1 - 'a' financial effect caused by coronavirus - at paragraph 46, the judge said:

'I remind myself of the judgment of ICC Judge Barber, that in relation to the first limb of the coronavirus test, whilst the burden is on the Debtor Company to establish that coronavirus has had a financial effect, it is a “low threshold” and that “the requirement is simply that ‘a’ financial effect must be shown; it is not a requirement that the pandemic must be shown to be the (or even a) cause of the company’s insolvency”. What has to be demonstrated is a “prima facie case, rather than prove the ‘financial effect’ relied upon on a balance of probabilities”.'

(2) Limb 2 - would the Debtor Company have been unable to pay its debts even if coronavirus had not had a financial effect on it? At paragraph 55, the judge said:

'Having decided that the coronavirus has had a financial effect on the Debtor Company, the burden of proof now moves to the Petitioning Creditor to establish that even if the coronavirus had not had such financial effect, the Debtor Company would still have been unable to pay the judgment sum.'

The judge went on the consider evidence/arguments on the two limbs. The analysis can be found for:

(1) from paragraph 42; and

(2) from paragraph 55.

While there were many pieces of evidence and argument dealt with by the judge, one interesting fact worth particular mention, was the timing of the non-payment founding the petition. At paragraphs 57 and 58, the judge said:

'The fact that the judgment debt is in respect of a contract entered into after the start of the coronavirus pandemic, with payment due in December 2020, does not assist me in finding that the Debtor Company would have been unable to pay its debts in any event. Indeed, [the Petitioning Creditors' witness] own evidence is to the effect that previous payments due under the contract were in fact made. It is only the final payment, which was disputed and referred to adjudication, which remains unpaid. That fact would appear to undermine any assertion that the fact of entering into the contract during the coronavirus period has a bearing on whether or not the Debtor Company could pay its debts at that time. [bold added]

(4) Doran v County Rentals Ltd (t/a Hunters) [2021] EWHC 3372 (Ch)

In this case, His Honour Judge Cadwallader (sitting as a Judge of the High Court) heard an appeal by a petitioner against a district judge's order, dismissing at a preliminary hearing (9.2.21), the petitioner's petition (presented 5.10.20) against a company of estate agents (the 'Company'). The petition had been for (alleged) debt arising from the Company's (alleged) failure to pass on rent collected by the Company from the petitioner's tenants. The Company also cross-appealed (see below). 

To keep with the facts for a moment, in or around 2009, the Petitioner property owner had 'agreed that the company should collect the rents for the properties and pay them (after deductions) to the petitioners' (paragraph 6). From about 2013, the Company started paying most of the rent collected into a Barclays bank account. On 13 March 2020 - so about 7 years later and at the start of the Covid 19 Pandemic - the petitioner suddenly announced that the Barclays' bank account was an account that was 'wholly unknown to her' (paragraph 6), contending that therefore the Company had failed to pay on the tenants rent it had collected for her (minus deductions). In June 2020 she claimed unpaid rental payments, for 2014-2019, of over £60,000 and on 27.8.20 she issued a 7 day demand (a non-statutory demand) for c.£65,442, requiring £50,000 to be paid. The Company denied liabilty, and the Petitioner presented the petition.

The Company denied liabilty, claiming the petitioner must have instructed it to pay the rental payments into that Barclays account, otherwise it would not have done so.

HHJ Cadwallader set out in his judgment the relevant provisions from: (1) the Insolvency Act 1986; (2) Corporate Insolvency and Governance Act 2020 ('CIGA'); and (3) Practice Direction – Winding up Petitions and the Corporate Insolvency and Governance Act 2020; in paragraphs 19 to 36 (set out in the footnote[5]).

Key points to note:

(1) The Court can strike out and dismiss a petition on other grounds, at: (i) a non-attendance PTR and (ii) preliminary hearing.

HHJ Cadwallader said that the Court is at liberty, at both: (1) the non-attendance PTR; and (2) the preliminary hearing, to exercise its general case management powers, and strike out and dismiss a petition on other grounds. In other words, the Court at those hearings, is not limited to just considering the 'likelihood that the Coronavirus Test will be satified'...etc. question.

HHJ Cadwallader said, at paragraph 36

'...plainly it is open to the Court, in exercise of its case management powers, to strike out and dismiss a petition on other grounds even at the non-attendance pre-trial review... It follows that, quite apart from the coronavirus test, there is no reason why the court should not in just the same way have considered other matters at the preliminary hearing as well, if it appears to be consistent with the overriding objective and a proper exercise of the court’s case management powers in any given case, even if that were the purpose for which preliminary hearings were provided for under the Practice Direction.'

It is noted that this is contrary to: (1) Practice Direction setting down the purpose of the Prelimiinary Hearing - to considers the likelihood of whether, at a public winding up list hearing, the Coronavirus Test will be found satisfied; and (2) the usual direction, listing the Preliminary Hearing, as a hearing to determine the likelihood ...etc. question.

(2) Determining the likelihood that the Coronavirus Test will be satisfied at a public winding up list hearing, does not itself involve consideration of whether the underlying grounds of the petition are likely to be made out;

HHJ Cadwallader said, at paragraph 37 'A question raised ..was whether the effect of CIGA and the Practice Direction was that the coronavirus test itself actually involved consideration of whether the grounds of the petition are likely to be made out. In my judgment, it did not.'

HHJ Cadwallader explained, at paragraphs 37 to 39:

'CIGA requires the Court to make a determination whether it is likely that the court will be able to make an order under s.122(1)(f) or 122(5)(b) of the 1986 Act before any notice, publication or advertisement of the petition – without which a petition cannot ordinarily proceed. In context, that means ‘likely given the restrictions on winding-up petitions for which Sch.10 provides’. The gloss on the statute provided by the Practice Direction is therefore not inaccurate.

The restrictions in question are those for which para.5 of that Schedule provides. Under that paragraph an order may be if the court is satisfied that the relevant ground would apply even if coronavirus had not had a financial effect on the company. As a matter of construction, the words ‘even if’ direct the Court to the financial effect of coronavirus, not to the applicability of the relevant ground. The question is the effect of coronavirus on the company. The court is to assume that the ground applies, rather than determining whether it is likely to apply or not, when considering whether, on the assumption that it does apply, it would have applied even without the effect of coronavirus. That may involve some mental gymnastics in at least some cases, but the practical difficulty would be mitigated by the ability of the court as a matter of case management to consider whether the petition ought to be struck out on other grounds in any event, though for that purpose the test is not mere likelihood (or unlikelihood).

I am reinforced in my view by that last consideration. It is, in my judgment, unlikely that Parliament would have intended to raise the threshold for petitions on grounds unrelated to coronavirus. That would have required clear words to that effect, which are not to be found in the para.5. of Schedule 10.' [bold added]However, HHJ

On this HHJ Cadwallader disagreed with obiter observations by Deputy ICCJ Passfield in PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch), stating 'I do not regard it as the case that the Court would necessarily have to consider any alleged dispute with the petition debt at the preliminary hearing.' (paragraph 40)

(3) There is not an inevitable inference that failure to pay a single undisputed debt will be sufficient to satisfy the Court under s.123(1)(e) of the Insolvency Act 1986 that the non-paying company is unable to pay its debts as they fall due.

HHJ Cadwallader set out the law in relation to inferences to be drawn when a company fails to pay the petitioner, one undisputed debt. He observed, at paragraph 41, that:

'...non-payment of a single undisputed debt may be sufficient to satisfy the court under s.123(1)(e) of the 1986 Act that a company is unable to pay its debts as they fall due: Taylors Industrial Flooring Limited v M and H Plant Hire (Manchester) Limited [1990] BCLC 216. However, normally it must be shown that the company was notified of the amount of the debt and given an opportunity to pay it: Re Easy Letting & Leasing [2008] EWHC 3175 (Ch). That is because it is a matter of inferring inability to pay from non-payment: ibid., para. [11]; and see Re A Company (No. 006798 of 1995) [1996] 1 WLR 491. The petitioners did not appear to dispute that the Company believed it was making payments to the Barclays account on instructions and there was no evidence that it was aware that it had any outstanding indebtedness to the Petitioners until March 2020. The fact that the alleged debt had accrued prior to the pandemic was not evidence that the Company was unable to pay its debts as they fell due before the pandemic.' [bold added]

In other words, for the Court to infer a company is unable to pay its debts as they fall due (and so satisfy s.123(1)(e)), it will normally need to have been the case that the company was notified of the amount of the debt and given an opporunity to pay it. It is from the notification/knowledge, and the failure to utilise the opportunity given, that an inabilty to pay it can be inferred. However, on the facts of Doran v County Rentals Ltd (t/a Hunters), the point was that the Company thought it was making the payments. It was unaware that it was not until the start of the pandemic. There had been no notification/knowledge and opportunity to pay, pre-pandemic.

HHJ Cadwallader stated, at paragraph 42:

'No doubt a failure to discharge debts when they fall due may found an inference that the debtor is unable to pay its debts as they fall due. But where, as here, there is a dispute about whether the debts had been discharged and, if they have not, the natural inference that it was only as a result of a mistake, it is impossible to infer from the failure to discharge debts and (sic) inability at the time the payments were made, to do so.' [bold added]

The DJ had '...rightly regarded it as relevant to the question whether non-payment could found an inference of inability to pay that it was only in March 2020 that the petitioners raised the matter with the Company. If the Company did not know that it was being said that the debt had not been discharged until then, then its failure to discharge until then it did not support such an inference.' (paragraph 44); HHJ Cadwallader said, at paragraph 45 '...given that the petitioners did not tell the Company until much later that they money was going to, as they allege, the wrong account, the supposed failure to pay when the sums fell due does not go to the question of inability to pay.'

(4) Confirms that the burden of establishing the 'even if' test lies on the petitioner

HHJ Cadwallader stated, at paragraph 46:

'It was common ground that coronavirus had a financial effect on the company before the presentation of the petition. The burden was therefore on the petitioners to demonstrate 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: Re a Company (Application to Restrain Advertisement) [2020] EWHC 1551 (Ch) at [45]).'

(5) on the facts, there had been 'ample reason' (paragraph 47) available to the DJ to find that the petitioner had failed to establish the 'even if' test was satisfied.

At paragraph 47, HHJ Cadwallader stated:

'There was ample reason for the Court to conclude that it was not likely to be able to make a winding up order because even if the Company was now unable to pay its debts as they fell due, the Court would not be likely to be satisfied that the Company would have been so unable even if coronavirus had not had a financial effect on it. The petitioners relied solely on the fact that the rental income allegedly not paid to them had fallen due for payment before the pandemic started and, as already indicated, this was far from sufficient to discharge the burden upon them for the reasons I have already given.'

(6) Determined the DJ was within his discretion, to refuse to strike out the petition, at the preliminary hearing, on other grounds

In the cross-appeal, the Company complained that the DJ at the prelimiary hearing, ought to have struck out the petition, on other grounds.

While it has already been noted that HHJ Cadwallader said a judge at a preliminary hearing had general case management powers to strike out a petition (for instance, because it lacks sufficient merit to be allowed to continue). However, on the facts, HHJ Cadwallader said, at paragraph 50 'The decision of the District Judge not to deal with the matter on the merits at the attended preliminary hearing was a case management decision. That is particularly apparent from his reference to ‘this forum’ that is, to the preliminary hearing. That decision fell squarely within the ambit of his discretion.'. The cross-appeal was dismissed.

(5) Re A Company (Preliminary Hearing under Schedule 10 to the Corporate Insolvency and Governance Act 2020) [2021] EWHC 2905 (Ch)

In this case, the preliminary hearing took place on 19-20.7.21, with ICCJ Barber dismissing the petition (paragraphs 1 and 72), with written reasons to follow. Those written reasons were handed down on 11.11.21. The reason for the delay is unknown.

Given the preliminary hearing took place on 19-20.7.21, in relation to a petition presented on 5.11.20, the applicable law was that contained in: (1) Schedule 10 of the Corporate Insolvency and Governance Act 2020, as it stood prior to 1 October 2020 (such changes to Schedule 10 having been introduced by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendments of Schedule 10) (No.2) Regulations 2021 (SI 2021 No. 1091)); and (2) Corporate Insolvency and Governance Act 2020 Practice Direction.

ICCJ Barber referred to the fact her judgment related to the law as it stood prior to 1 October 2021 (paragraph 1) - referring to the Schedule 10 she was applying as the 'old' Schedule 10 (paragraphs 1 and 29)

Some basic facts were that:

(1) the Company's business was property development. Its only development project was a residential development at a freehold site ('the Site'), entailing the construction of 8 flats, with the potential for 2 additional flats;

(2) the Petitioner lent money to the Company under, eventually, a 'New Loan Agreement'; the term of the facility had a repayment date of 31 March 2020; the Company calculated that selling 4 of the flats would raise enough to repay the loan;

(3) The Company maintained that from 24 July 2019 until the intervention of the pandemic on 24 March 2020, the Site was being developed and good progress was being made towards completion of the 8 flats;

(4) In September/October 2019, however, the Company decided to apply to the local planning authority for permission to erect 2 additional flats. The Company recognised that this new planning application could result in the development not being completed in time to sell 4 flats and to repay the Petitioner by that method by 31 March 2020. For that reason, in the autumn of 2019, the Company set about (through its directors, shareholders and their joint family unit) raising alternative finance - namely: (1) Company's director and family starting attempting to sell 4 unencumbered properties owned by them personally in India ('the Indian Properties'); and (2) arranging bridging finance. Neither of these produced any fruit, because of the intervention, it was said, of the Pandemic;

(5) the Company did not repay the loan on 31 March 2020;

(6) Petitioner sent to the Company a (non-statutory) demand for payment dated 30 June 2020; The Company admitted that it received the demand letter dated 30 June 2020 in early July 2020 and that it did not comply with it. The Company did not dispute the sums due under the New Loan Agreement (paragraph 27);

(7) The Company's case was '...that it is a victim of the pandemic. It maintains that were it not for the financial effects of the global pandemic, it would have been able to comply with the demand dated 30 June 2020 and pay the sums due under the New Loan Agreement.' (paragraph 27)

In the normal way, ICCJ Barber went through Schedule 10 paragraph 5(1) and paragraph 5(3). Considering, and largely dismissing, the arguments put forward by the Petitioner.

ICCJ Barber made the following points:

(1) '...I remind myself that the Company's task is to establish a prima facie case under paragraph 5(1). If it clears this hurdle, it is for the Petitioner to satisfy the court on a balance of probabilities under paragraph 5(3).' (paragraph 46)

(2) 'I remind myself that when determining any contested issue, the Court should be reviewing all evidence on that issue 'with a critical eye'. Ultimately the question whether the paragraph 5(1) threshold (or indeed the paragraph 5(3) threshold) has been cleared in a given case will inevitably turn on the facts of the individual case.' (paragraph 34)

(3) '...the relevant period for the purposes of paragraph 5(1)(c) is the period up to the date of presentation on 5 November 2020, not 31 March 2020.'

(4) 'On the Company's evidence, but for Covid, the Building would have been airtight by the end of March 2020. It would then have taken 6-8 weeks to obtain bridging finance (end of May 2020), which would in turn have enabled repayment of the loan at or about the end of May 2020, or on any footing, prior to the written demand dated 30 June 2020. ....For the purposes of clearing the paragraph 5(1) threshold, the Company needs simply to establish a prima facie case of a 'financial effect' (as defined) before the presentation of the petition. The petition was presented on 5 November 2020. For the purposes of paragraph 5(1), 31 March 2020 is not the governing date.' (paragraph 49)

(5) 'In my judgment... the Company has cleared the paragraph 5(1) threshold. The evidence before me establishes a clear prima facie case that before the presentation of the petition, the Company's financial position worsened in consequence of, or for reasons relating to, coronavirus: paragraph 5(1)(c) and 21(3) of Schedule 10. The Company has established a prima facie case that coronavirus (i) caused material delays in the building project, both during and after the first lockdown (ii) triggered delays in the loan/equity investment which the Company expected to receive from its shareholders (Company director] and her sister and their joint family) through the sale of the Indian Properties and (iii) caused material delays in the re-financing of the project.' (paragraph 53)

(6) Under the subheading 'Paragraph 5(3)', ICCJ Barber said: 'As the paragraph 5(1) threshold is cleared, the next question is whether the Petitioner can satisfy the court that the ground specified in section 123(1)(e) would apply even if coronavirus had not had a financial effect on the company. If the Petitioner is able to satisfy the court of this, the court may properly conclude that it is 'likely' to make a winding up order having regard to the coronavirus test and may then list the petition for a hearing in the winding up list. If, on the other hand, the Petitioner is not able to satisfy the court that the ground specified in section 123(1)(e) would apply even if coronavirus had not had a financial effect on the Company, the court will not be able to conclude that it is 'likely' that it will be able to make a winding up order and should therefore dismiss the petition: paragraph 8.1 of the CIGA PD.' (paragraph 54)

(7) 'When considering at the preliminary hearing, in the language of paragraph 5(3), whether the Court is satisfied that the 'ground specified in section 123(1)(e) would apply even if coronavirus had not had a financial effect on the company, the Court must have regard to the petitioner's pleaded case; that is to say, the basis, as set out in the petition, upon which the petitioner relies upon s.123(1)(e). In the present case, the petition expressly relies upon the letter of demand dated 30 June 2020. Reading the petition as a whole, I am satisfied that it is the Company's failure to comply with the demand for payment dated 30 June 2020 and not the due date for payment set out in the New Loan Agreement which forms the basis of the Petitioner's pleaded reliance upon s.123(1)(e). There would be no point otherwise in referring to the letter of 30 June 2020 in the petition. I am fortified in this conclusion by the terms of the demand letter of 30 June 2020 itself. The letter gave notice of the Petitioner's election to exercise its rights under clause 25.2 to cancel all its outstanding obligations under the agreement and to 'declare the loan and all accrued interest and all other amounts accrued or outstanding to be immediately due and payable…' Moreover, pleading points aside, in the circumstances of this case, ...the Court would clearly wish to see a demand for repayment before concluding, for the purposes of s.123(1)(e), that the Company was unable to pay its debts as they fell due. In such circumstances, in the words of Chadwick J, the court should be slow to reach the conclusion that a company is unable to pay its debts from the mere fact of non-payment of a debt which has never been demanded of it at all: In re a Company (No 006798 of 1995) and Re Easy Letting & Leasing. Absent the demand letter of 30 June 2020, in the circumstances of this case, ground s.123(1)(e) would not be made out.

I shall therefore proceed on the basis that for the purposes of the exercise to be undertaken pursuant to paragraph 5(3), the Court should take 30 June 2020 (or a few days thereafter) as the relevant date and not 31 March 2020. In doing so, I remind myself that the burden of proof is on the Petitioner.' (paragraph 66-67)

(8) 'I...note that (1) for the purposes of paragraph 5(3), the burden of proof is on the Petitioner and not the Company and (2) for reasons previously explored, the date at which the Company's position falls to be considered for the purposes of Paragraph 5(3) is 30 June 2020 (or a few days thereafter; hereafter 'the determination date'), not 31 March 2020.' (paragraph 69)

(9) 'On the evidence before me, the Petitioner has failed to satisfy me on a balance of probabilities that the ground specified in s.123(1)(e) would apply as at the determination date even if coronavirus had not had a financial effect on the Company.

Quite the contrary; on the evidence before me, I am satisfied that it is more likely than not that, but for the pandemic, the Company would have been in a position to refinance the project and repay the debt owed to the Petitioner by the end of May 2020/first week of June 2020. The building would have been airtight by the end of March 2020 (or the first week in April 2020 at the latest) and arranging refinance on an LTV of less than 50% would have taken 6-8 weeks, even if one were to leave out of account the anticipated proceeds of sale of the two Indian properties. If those proceeds are taken into account, the LTV on any refinancing package would have been even lower, thereby increasing the range of such packages available to the Company within such timescales.' (paragraphs 70-71)

SIMON HILL © 2021-2022

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

[1]In respect to the application for an order restraining advertisement of the Petition, the Company also argued that:

'...this is "premature and pointless" because the Petitioner has already undertaken not to advertise the Petition without giving ten business days' notice (see para 20 above). In fact, in light of para.19(2) of Schedule 10 to the 2020 Act, the Petitioner is not presently entitled to advertise the Petition in any event.' (paragraph 31)

The Deputy ICC Judge said, at paragraphs 32 to 36 inclusive:

'It is true that para.19(2) of Schedule 10 to the 2020 Act has removed the immediate need for a company served with a winding up petition to seek an injunction to restrain the advertisement of the petition. Moreover, as the court will necessarily have to consider any alleged dispute of the petition debt at the preliminary hearing listed in accordance with the CIGA PD in order to determine whether it is likely that it will be able to make an order under s.122(1)(f) of the 1986 Act, a company may simply wait until that hearing to determine the issue.

But I see no reason why this should prevent a company from applying at an early stage for the strike out and/or summary dismissal of a petition if it wishes to do so. Indeed, there are likely to be good grounds for doing so in a case of real urgency, such as where the presentation of the petition constitutes an event of default for the purposes of a funding agreement.

In the circumstances, whilst I accept that it was unnecessary for the Company to apply for an order restraining the Petitioner from advertising the Petition in addition to seeking its dismissal, I do not consider that the Application is "premature" or "pointless"...'

[2] In PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch), under the subheading ‘Legislative Framework’, Deputy ICC Judge Passfield said, at paragraphs 26 to 29 inclusive:

By s.122(1)(f) of the 1986 Act, a company may be wound up by the court if the company is unable to pay its debts. By s.123(1)(e) of the 1986 Act, a company is deemed unable to pay its debts if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. A failure by a company to pay a debt which is due and not disputed is of itself evidence that the company is unable to pay its debts as they fall due (Cornhill Insurance Plc v Improvement Services Ltd [1986] 1 WLR 114).

A petition founded on a debt that is disputed on genuine and substantial grounds would be an abuse of process and/or is bound to fail (Mann v Goldstein [1968] 1 WLR 1091). A dispute about a petition debt may nevertheless be determined on the hearing of the petition if it is sufficiently simple and straightforward and all the evidence necessary to resolve it is before the court, particularly if there is a short point of law or construction (see French: Applications to Wind Up Companies (3rd ed) at 7.526).

By para.5(1) and (3) of Schedule 10 to the 2020 Act, where (a) a creditor presents a petition for the winding up of a registered company under s.124 of the 1986 Act during the "relevant period", (b) the company is deemed unable to pay its debts on the ground specified in s.123(1)(e) of the 1986 Act (i.e. the company is unable to pay its debts as they fall due) and (c) it appears to the court that coronavirus has had a financial effect on the company before the presentation of the petition, the court may only make a winding up order against the company if it is satisfied that the ground in s.123(1)(e) of the 1986 Act would apply (i.e. the company would be unable to pay its debts as they fall due) even if coronavirus had not had a financial effect on the company. By para.21(1) of Schedule 10 to the 2020 Act (as modified by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020/1483), the "relevant period" means the period which begins with 17 April 2020 and ends with 31 March 2021. By para.21(3) of Schedule 10 to the 2020 Act, coronavirus has a "financial effect" on a company if (and only if) the company's financial position worsens in consequence of, or for reasons relating to, coronavirus.

The evidential burden of showing that coronavirus had a "financial effect" on the company before the presentation of the petition is on the company. In this regard, the company need only establish a prima facie case. If that is established, the evidential burden shifts to the petitioner to show that even if the financial effect of coronavirus is ignored, the company would still be unable to pay its debts as they fall due (Re A Company (Application to Restrain Advertisement of a Winding Up Petition) [2020] EWHC 1551 (Ch); [2020] BCC 773 at [40] and [44]-[45]).’

[3] In PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch), the Deputy ICC Judge said, at paragraph 71:

‘I accept that it would be sufficient for the purposes of para.5(1)(c) of Schedule 10 to the 2020 Act for the Company to demonstrate a prima facie case that coronavirus had an indirect financial effect of the type identified by [counsel for the Company] (i.e. Mr Neate was unable to pay the purchase price for the Sale Shares and the Loan because of the coronavirus pandemic and this caused the Company to incur a liability which it would not otherwise have had). In this regard, I note that the definition of "financial effect" in para.21(3) of Schedule 10 to the 2020 Act is a wide one and it is sufficient for a company to demonstrate that its financial position worsened either "in consequence of" or "for reasons relating to" coronavirus (see para 28 above).’

[4] In Maud v Aabar Block SARL [2015] EWHC 1626 (Ch); [2015] BPIR 845, Rose J said, at paragraph 29:

‘…the presentation of a winding up petition in respect of a debt which is otherwise undisputed will only amount to an abuse of process in two situations. The first is where the petitioner does not really want to obtain the liquidation of the company at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take. The second is where the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors. Rose J cautioned that the jurisdiction of the court to dismiss a petition based on an undisputed debt on the grounds of collateral purpose must be exercised sparingly.’

[5] In Doran and Doran v County Rentals Ltd (t/a Hunters) [2021] EWHC 3372 (Ch), under the heading 'The Law', HHJ Cadwallader undertook a walk-through of the applicable law from: (1) the Insolvency Act 1986; (2) Corporate Insolvency and Governance Act 2020 ('CIGA'); and (3) Practice Direction – Winding up Petitions and the Corporate Insolvency and Governance Act 2020. Taking this in stages:

(1) The Insolvency Act 1986 - in paragraphs 19 and 20, HHJ Cadwallader said:

'Section 122(1)(f) Insolvency Act 1986 provides that a company may be wound up by the court if it is unable to pay its debts. A company is deemed to be unable to pay its debts if, inter alia, it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due: s.123(1)(e) of the 1986 Act. That is the ground upon which this petition was presented.

In response to the coronavirus pandemic, the Corporate Insolvency and Governance Act 2020 (“CIGA”) was enacted.'

(2) Corporate Insolvency and Governance Act 2020 - in paragraphs 21 and 28, HHJ Cadwallader said:

'CIGA para.2 Sch. 10

CIGA provided that during the relevant period, a creditor might not present a winding up petition on the ground specified in s.123(1)(e) of the 1986 Act unless the creditor had reasonable grounds for believing that: (a) coronavirus had not had a financial effect on the company; or (b) the ground would apply even if coronavirus had not had a financial effect on the company: para.2(3) and (4) Sch.10 CIGA.

Coronavirus has a financial effect on a company if and only if the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus: para.21(3) Sch.10 CIGA.

By para.21(1) Sch.10 CIGA (as amended by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021)), the relevant period was 27 April 2020 to 30 September 2021 and accordingly has expired since the date of the decision of the District Judge.

Para.2(3) prohibits presentation of a petition in the circumstances in which it applies. Counsel for the Company described it as a restriction on standing to petition.

CIGA para 5 Sch.10

By para.5(1) and (3) Sch.10 CIGA, where a creditor presents a petition for the winding up of a registered company under section 124 of the 1986 Act in the relevant period, and the company is deemed unable to pay its debts on a ground specified in section 123(1) or (2) of that Act, and it appears to the court that coronavirus had a financial effect on the company before the presentation of the petition, then 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.

Thus para. 2 is a restriction on standing of petitioners, while para.5 is a restriction on the jurisdiction of the court.

Para 19 Sch.10

When a petition is presented on or after Sch.10 came into force but before the end of the relevant period, any provision of the Insolvency (England and Wales) Rules 2016 which requires or permits (or authorises the court to require or permit) notice, publication or advertisement of the petition does not apply until such time as the court has made a determination in relation to the question of whether it is likely that the court will be able to make an order under s.122(1)(f) or 122(5)(b) of the 1986 Act: para.19(2) Sch.10 of the Act.

This provision does not refer explicitly, let alone exclusively, to the coronavirus test; but it is part of the scheme under which the coronavirus test was introduced.'

(3) Practice Direction – Winding up Petitions and the Corporate Insolvency and Governance Act 2020 - in paragraphs 30 and 36, HHJ Cadwallader said:

'The Practice Direction – Winding up Petitions and the Corporate Insolvency and Governance Act 2020 issued on 3rd July 2020 provided that in the case of a petition to wind up a registered company on a ground specified in section 123(1)(e) or (2) of the 1986 Act, the “the coronavirus test” was whether the condition in paragraph 5(3) of Schedule 10 to the 2020 Act was met.

That condition was that where a creditor presented a petition for the winding up of registered company in the relevant period and the company was deemed unable to pay its debts on a ground specified in section 123 (1) or (2) of that Act and it appeared to the court that coronavirus had a financial effect on the company before the presentation of the petition, the court might 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 was satisfied that the ground would apply even if coronavirus had not had a financial effect on the company.'

It is to be noted that “the coronavirus test” refers only to the restrictions on jurisdiction in para.5 Sch.10 CIGA and not to the restrictions on standing in para.2 of that Schedule.

 Practice Direction provided for a procedural innovation, a non-attended pre- trial review, to give directions for a preliminary hearing to decide whether it is likely that it will be able to make an order ‘having regard to the coronavirus test’.

“4.1 Upon presentation of a winding up petition, provided it is not rejected for filing under paragraph 2 above, the petition shall be listed for a non- attendance pre-trial review with a time estimate of 15 minutes for the first available date after 28 days from the date of its presentation.

“4.2 The purpose of the non-attendance pre-trial review is to enable the court to give directions for a preliminary hearing in order for the court to determine whether it is likely that it will be able to make an order under section 122(1)(f) … of the 1986 Act having regard to the coronavirus test.”

The words ‘having regard to the coronavirus test’ do not appear in the legislation.

Para.5.1 of the Practice Direction provides a that the petition is to remain private (subject to qualifications) until the Court has concluded that it is likely to be able to make an order having regard to the coronavirus test.

If the petition is not opposed and the Court is so satisfied (that is, satisfied that the coronavirus test is passed) at the nonattendance pre-trial review, it is to list the petition for hearing. Otherwise, the court is to list a preliminary hearing and give directions accordingly: para.7 of the Practice Direction.

Paragraph 8 the Practice Direction provides

“8.1 At the preliminary hearing:

(1) if the court is not satisfied that it is likely that it will be able to make an order under section 122(1)(f) or 221(5)(b) of the 1986 Act having regard to the coronavirus test, it shall dismiss the petition; or

(2) if the court is satisfied on the evidence before it that it is likely that it will be able to make an order under section 122(1)(f) or 221(5)(b) of the 1986 Act having regard to the coronavirus test it shall list the petition for a hearing in the winding up list.”

Thus, failure to pass the coronavirus test at the non-attendance pre-trial review is not to lead to the petition’s being struck out and dismissed at that stage, and before the preliminary hearing. But plainly it is open to the Court, in exercise of its case management powers, to strike out and dismiss a petition on other grounds even at the non-attendance pre-trial review, just as the District Judge did in this case. It follows that, quite apart from the coronavirus test, there is no reason why the court should not in just the same way have considered other matters at the preliminary hearing as well, if it appears to be consistent with the overriding objective and a proper exercise of the court’s case management powers in any given case, even if that were the purpose for which preliminary hearings were provided for under the Practice Direction.''