Case Study: Successful defence of winding up petition in COVID-19

Our insolvency team were instructed to defend a winding up petition for a disputed debt of nearly a million pounds presented against our client company in the midst of the global pandemic following implementation of the Corporate Insolvency and Governance Act 2020. The aggressive petition was successfully dismissed with the award of costs on the indemnity basis.

Creditor winding up petition presented in COVID-19

The petition was presented on 8 September 2020 for the sum of £825,000 on the basis of a share purchase agreement between the Petitioner and Company.

Under the Corporate Insolvency and Governance Act 2020 (“CIGA”), presentation of statutory demands and winding-up petitions continues to be restricted until at least 31 March 2021 to protect companies from aggressive creditors as a result of coronavirus related debts. A Petitioner is therefore required to overcome the coronavirus test under CIGA.

Was there a genuine and substantial dispute?

The Petitioner alleged an absolute liability whereas the Company contested this position claiming that the agreement was conditional and in the absence of fulfilment of certain conditions, had terminated and therefore no debt was owing to the company.

A winding up petition may be challenged by a company on the following grounds:

1. The debt alleged in the demand to be owing is genuinely disputed on substantial grounds by the company.
2. The company has a genuine right of set-off against the creditor which exceeds the amount claimed in the demand.
3. In certain other limited circumstances (for example such as Jurisdiction, Company likely to become insolvent, Technical or procedural error or Delay).

Application for injunction against advertisement and early strike out of petition

Our insolvency team was instructed on an urgent basis and given the detrimental effect that advertisement of a winding up petition could have on a company, we were instructed to make an urgent application to the Court to restrain advertisement. Upon becoming aware that there was clearly a genuine and substantial dispute, our insolvency team made an application for early strike out of the abusive petition.

CIGA allows for restrictions on advertisement until a court has applied the coronavirus test and determined whether the petition should be allowed to proceed. The Judge noted that there was an immediate need for the company to to seek an injunction and commented that there was “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”.

What if the debt arose during COVID-19?

Even if the agreement resulting in the debt was made during the pandemic (and thereby one could infer that the company was not affected by coronavirus) this does not mean that the company is unable to pay its debts in any event.

The Judge at paragraph 77 of his judgment refers to the fact that just because a debt has been incurred during the lockdown with a payment date in the lockdown, does not mean that a petitioner can say that the company would have been unable to pay its debts in any event.

Whilst it was sufficient for a company to show it had suffered an indirect financial effect as a result of the pandemic, the Company was expected to to adduce sufficient evidence of the effect of coronavirus.

What is the coronavirus test?

The CIGA restrictions provide that a creditor may not present a statutory demand or winding up petition unless it has reasonable grounds to believe that coronavirus has not had a financial effect on the debtor or the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor. 

Petitions are now listed for a preliminary hearing where the Court will apply the coronavirus test and determine whether the petition should continue. If the Court is not satisfied it is likely it will be able to make a winding-up order having regard to the coronavirus test, it may dismiss the petition.

See our post for further details on the effect of coronavirus test on winding up petitions and what steps a company should be taking in serving evidence in response to a petition.

Read the full judgment for PGH-Investments-v-Ewing-2021-EWHC-533-Ch.

Instructing solicitors to advise on winding up petitions in COVID-19

Given the urgent nature of winding up petitions and the detrimental effects on a company and individuals livelihood, it is important to seek legal advice on any insolvency matter from the outset.

We’re masters of insolvency dispute litigation. We are a specialist City of London law firm made up of Solicitors & Barristers. We’re based in the Middle Temple Inns of Court (next to the Royal Courts of Justice where the High Court and Central London County Courts are based).  We’re experts in dealing with matters surrounding insolvency in particular our team have unparalleled experience at both issuing and defending winding up petitions vigorously at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction under the Insolvency Rules. We provide a quick no cost initial telephone case review to establish whether or not we can help you; just call one of our team on 02071830529.