The recent case of A Company, Re  EWHC 2289 (Ch), demonstrates the protection that companies are afforded under the Insolvency Act 1986, the Corporate Insolvency and Governance Act 2020 and the associated Practice Directions in light of the impact that the coronavirus pandemic has had on businesses.
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The case involved a petitioning creditor who was owed £146,899.06 by the respondent company and issued a winding-up petition pursuant to Section 124(1) of the Insolvency Act 1986 (“the 1986 Act”) in order to recover the debt. The petitioning creditor sought to recover the outstanding balance on the basis that the debtor company was unable to pay its debts in accordance with Section 122(1)(f) of the 1986 Act.
However, the petitioning creditor, which assumed the burden of proof, failed to establish its case in light of Sections 123(1)(e) and (2) of the 1986 Act. This was a result of the impact of the Corporate Insolvency and Governance Act 2020 (“the 2020 Act”) and the associated Practice Directions, which were enacted due to the onset of the coronavirus pandemic. The 2020 Act makes temporary changes to the law in relation to the governance and regulation of companies and other entities.
Part 2 of Schedule 10 of the 2020 Act in particular contains restrictions about the presentation of winding-up petitions and making winding-up orders in circumstances where the company has been financially affected by the coronavirus.
How does the Insolvency Act 1986 protect companies facing financial hardship due to the coronavirus pandemic?
The Insolvency Act 1986 contains provisions to protect companies affected by the coronavirus crisis. Thus, a company made insolvent due to the impact of the coronavirus, will not be wound-up if it was solvent prior to the onset of the pandemic.
Upon hearing the case of A Company, Re EWHC 2289 (Ch), Judge Kelly applied the test established in Re A Company (Application to Restrain Advertisement of a Winding-Up Petition)  EWHC 1551 (Ch), in which Judge Barber used a two-stage approach:
- The debtor company has the burden of proving that the coronavirus had a financial effect on it before the presentation of the winding-up petition. Judge Barber emphasised that financial impact must be shown but it is not a requirement to prove that the pandemic was the cause of the company’s insolvency.
2. If the debtor company can show that the coronavirus had a financial impact, the burden shifts to the petitioning creditor to demonstrate that if the financial effect of the coronavirus is ignored, the debtor company would be insolvent within the meaning of Sections 123(1)(e) and (2) of the 1986 Act. The former section states that a company will be considered insolvent on a cash flow or balance sheet basis if it is proved to the court, ‘that the company is unable to pay its debts as they fall due.’ The latter section states the court will also consider a company to be insolvent if it can be established that the value of its assets is less than the amount of its liabilities.
The burden of proof in light of A Company, Re  EWHC 2289 (Ch)
The judge held that the first stage of the above test was satisfied in the case, as the debtor company was able to demonstrate that it was impacted financially by the coronavirus pandemic.
Thus, the burden of proof shifted to the petitioning creditor to demonstrate that the debtor company would still be unable to pay its debt, even if the coronavirus pandemic had not had a negative impact on its financial position. The petitioning creditor alleged that the debtor company had been unable to pay its debts that fell due since 14 November 2018. However, the petitioner failed to bring forth sufficient evidence to demonstrate this and thus, failed to satisfy the second stage of the test. Furthermore, the judge stressed the general negative impact that the coronavirus pandemic has had on companies.
How is does the Corporate Insolvency and Governance Act 2020 protect my company against insolvency proceedings during the coronavirus pandemic?
Under Schedule 10, Section 2(3) of the 2020 Act, a creditor may not, during the relevant period, present a winding-up petition under Section 124 of the 1986 Act for the winding-up of a registered company on the grounds specified in Section 123(1)(e) or (2) unless the condition in paragraph (4) in met. This condition is that the creditor must have reasonable grounds for believing the coronavirus has not had a financial effect on the debtor company.
The coronavirus will be considered to have had a financial effect on a company if its financial position worsens in consequence of, or for reasons relating to, the coronavirus (Schedule 10, Sub-paragraph 21(3), 2020 Act).
According to sub-paragraph 5(1), Schedule 10 of the 2020 Act, Sub-paragraph 21(3) only 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 presentation of the petition.”
Thus, under the 2020 Act, the court may only issue a winding-up order under Section 122(1)(f) on the ground specified in Section 123(1)(e) or (2) of the 1986 Act, if the court is satisfied the ground would apply even if coronavirus had not had a financial effect on the company.
The Practice Directions also protect companies affected financially by the coronavirus pandemic. Paragraph 3 of the Practice Directions states that a winding-up petition will not be accepted unless it contains the statement required by Rule 7.5(1) as amended by Paragraph 19(3) of Schedule 10 of the 2020 Act. The petition must also contain a summary of the grounds relied upon by the petitioning creditor for the purposes of the coronavirus test set out in Re A Company (Application to Restrain Advertisement of a Winding-Up Petition)  EWHC 1551 (Ch).
In A Company, Re  EWHC 2289 (Ch), Judge Kelly held that the financial effect of the coronavirus pandemic on the debtor company was, “inextricably linked” to its inability to pay the judgment debt (paragraph 62, A Company, Re  EWHC 2289 (Ch).
Judge Kelly also stated:
“To be perfectly honest, I thought it would go without saying that the pandemic has had a negative effect on the Company’s financial position.” – Paragraph 59 of A Company, Re  EWHC 2289 (Ch)
Therefore, as the petitioning creditor failed to establish the criteria set out in the second stage of the test, the judge ruled in favour of the debtor company and dismissed the winding-up petition served by the petitioning creditor.
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