Winding up petitions during the coronavirus pandemic

Restrictions introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) designed to protect companies from the threat of winding up during the pandemic will remain in place until 30 June 2021.

Temporary measures first introduced in 26 June 2020 has meant restrictions on the use of statutory demands and winding-up petitions for creditors when seeking payment.

A winding up petition can’t be presented on the grounds that a company is unable to pay its debts:

• based on an unsatisfied statutory demand issued during the period commencing on or after 1 March 2020 until 30 June 2021; and
• without satisfying the court that (a) the coronavirus pandemic has not had a financial effect on the debtor company; or (b) of the company’s inability to pay its debts irrespective of coronavirus (coronavirus test).

Statutory demands and the threat of insolvency proceedings have always been a useful tool for creditors seeking payment. Not being able to use this as evidence of a company’s inability to pay its debts, as well satisfying the coronavirus test, has had a significant impact on a creditor’s debt recovery options.

So, when can a creditor present a petition?

First, a creditor must be able to show that the company can’t pay its debts by other means (other than an unsatisfied statutory demand). For example, by demonstrating the company is either cash flow or balance sheet insolvent. Or where the creditor has obtained judgement against the company and have then taken enforcement action which has failed to satisfy the debt.

Second, it’s necessary to pass the coronavirus test and the petition must contain a summary of the grounds relied upon by the creditor for the purposes of the coronavirus test. Unsurprisingly, there have not been many reported cases on how the courts will apply the coronavirus test. We’ve rounded up the key takeaways from those that have been reported or commented on below.

Re: Tundrill Ltd CR-2020-002351 (unreported)

• A winding up order was made as the debt was historic, there was evidence that the debtor was balance sheet insolvent for two years prior to the pandemic.

Re: a Company [2020] EWHC 1551 (Ch)

• The burden falls on the creditor to pass the coronavirus test.
• The threshold for finding that coronavirus has had a financial effect on the company is low – the company doesn’t need to demonstrate that coronavirus was a cause of its inability to pay its debts; it only needs to establish a prima facie case that there has been a financial effect.
• Where a company is demonstrable not viable irrespective of coronavirus a winding up order can still be made.

Newman v Templar Court [2020] EWHC 3740 (Ch)

• The debtor failed to establish a prima facie case that coronavirus had had an adverse financial effect.

Re PGH Investments Limited [2021] EWHC 533 (Ch)

• The petition was dismissed on grounds that the company was not liable to pay the debt. but Deputy ICC Judge Passfield made some useful comments on the coronavirus test.
• The definition of “financial effect” is sufficiently wide to include indirect effects. A company could demonstrate that their financial position worsened either “in consequence of” or “for reasons relating to” coronavirus.
• If the company can establish a prima facie case that coronavirus has had a financial effect, the burden would shift to the petitioning creditor to show that the company wouldn’t have been able to pay its debts even if coronavirus had not had a financial effect on the company.

What’s clear from these cases is that the restrictions don’t always mean creditors can’t pursue winding up proceedings. In appropriate circumstances they can be used, and the restrictions don’t provide an escape for all debtors. Even though the threshold for the test is low, a company saying that coronavirus has had a financial effect on their business will need to adduce evidence in support. Where it can be demonstrated that the company is not viable irrespective of coronavirus, a winding up order may still be made.

For more help and specialist insolvency and restructuring advice, contact the Banking and Finance team for a free consultation.