Coronavirus test: What does this mean for winding-up petitions?

CIGA came into force on 25 June 2020 which was implemented to afford some protection to companies who are facing debt recovery action including insolvency proceedings as a result of the effect of coronavirus on the company. Nearly a year on, it is difficult to find a company that has not been impacted by coronavirus in some way but the way the courts have applied the test to companies facing petitions does vary. It is therefore important to seek legal advice on a petition at the outset to ensure whether debtor or creditor, you are prepared for any legislative hurdles in the proceedings.

Are winding-up petitions still restricted?

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.

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.

What does CIGA say?

Restriction on winding-up petitions: registered companies

Schedule 10, paragraph 2 of the Corporate Insolvency and Governance Act 2020 provides:

Part 2: Restriction on winding-up petitions: registered companies

(1)A creditor may not during the relevant period present a petition under section 124 of the 1986 Act for the winding up of a registered company on a ground specified in section 123(1)(a) to (d) of that Act (“the relevant ground”), unless the condition in sub-paragraph (2) is met.

(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.

(3)A creditor may not during the relevant period present a petition under section 124 of the 1986 Act for the winding up of a registered company on the ground specified in section 123(1)(e) or (2) of that Act (“the relevant ground”), unless the condition in sub-paragraph (4) is met.

(4)The condition referred to in sub-paragraph (3) is that the creditor has reasonable grounds for believing that—

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

(b)the relevant ground would apply even if coronavirus had not had a financial effect on the company.

(5)This paragraph is to be regarded as having come into force on 27 April 2020.

What evidence will companies need to satisfy the coronavirus test?

Whilst companies will need to submit witness evidence, verified by a director of the company, mere statements may weaken the company’s position without support of any documentary evidence.

Courts will be looking for balance sheet solvency and evidence of a company’s debts and liabilities, particularly where the company is alleging coronavirus has had a financial impact on the company.

Often opponents will be able to adduce evidence about your company which is publicly available on Companies House therefore the Company needs to prepare to rebut any inferences that can be drawn or arguments that can be made about the Company’s financial position based on the last accounts filed at Companies House.

  • If the company has lost an investment, the Court may wish to see evidence of that investment e.g. an agreement or correspondence from that investor.
  • If the company’s offices were closed or staff were made redundant or furloughed, the Court may expect correspondence and agreements reflecting the same, which companies are required to hold.
  • If directors or employees were relying on travelling for business which was cancelled as a result of the pandemic, the Court may look for receipts or other evidence of cancelled flights.

Companies may wish to consider expert evidence or third party evidence.

In Re a company [2020] EWHC 1551 (Ch), which case concerned a company’s application to restrain the advertisement of a winding up petition (presented on 13 May 2020 based on a statutory demand served on 27 March 2020), where ICC Judge Barber had before her, some evidence to consider the effect of coronavirus on the company.

In contrast, in Newman v Templar Corporation Limited [2020] EWHC 3740 (Ch), the Court commented that the witness evidence as to the effect of coronavirus test on the company was vague. There was no real cogent evidence and no explanation as to why the evidence had not been provided. It was held that the company had failed to demonstrate even a prima facie case of showing that coronavirus had a financial effect on the company. This addresses the need to take witness evidence seriously.

What is the purpose of witness evidence?

To set out in writing the evidence in chief that a witness of fact would be allowed to give if they were called to give oral evidence at trial.

The Court will be assisted by witness evidence with supporting documents from both parties in order to come to a determination.

Evidence to support application for injunction to restrain advertisement of a Winding-up Petition

Upon presentation of a petition, the company can apply to the court for an injunction to restrain the advertisement of the petition and/or seek dismissal of a petition. The court can dismiss the petition if there is prima facie evidence of a substantial and bone fide dispute, cross claim or counterclaim.

The application will normally need to be supported by a witness statement from either a director or an employee of the company. The statement should:

  • Set out clearly and comprehensively the grounds upon which the debt is disputed.
  • Exhibit evidence in the form of correspondence between the parties and contemporaneous documents.
  • Contain a summary of the financial affairs of the company and include the latest balance sheet, profit and loss accounts and forecast.
  • Ideally the hearing of the application should be on notice. If there is insufficient time it is possible to be without notice.

One way by which a party can seek to restrain the presentation of a winding up petition is to show that the debt underlying the possible winding up proceedings is disputed, possibly by showing that there is a possible defence to the claim.

Consequences of failure to serve witness evidence

If a witness statement for use at trial is not served within the time specified by the court, then the witness may not be called to give oral evidence unless the court gives permission.

If you fail to comply with a court deadline or court requirement, you will need to apply to the Court for permission for relief from sanctions.

Instructing solicitors to advise on witness evidence

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 regularly advise creditors and debtors on the process of issuing and defending winding up petitions and the importance of witness evidence.

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.

Want legal advice on your Insolvency case?

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