Edward Mordaunt, University of Oxford (Former BPTC Student & CO.IN Volunteer 2019/20 at City Law School) & Callum Reid-Hutchings, University of Cambridge (Former BPTC Student & CO.IN Volunteer 2019/20 at City Law School)
23 November 2020
Much has been written on the temporary and permanent changes to company insolvency introduced by the Corporate Insolvency & Governance Act 2020. In this blog post, we want to focus on a rather neglected matter. What are the key points which a litigant in person should be aware of if he or she appears in the winding up court? There are five key points we want to make.
First, the largest concern currently will be the impact of Covid-19 on one’s business. Here temporary restrictions have been placed on the ability for statutory demands and winding-up petitions to be brought. These restrictions will not currently cease until 31 December 2020. However, this can be challenged if the creditor(s) can show that there are reasonable grounds to believe the Covid-19 pandemic did not have a financial effect on the company, or that the current outstanding debt would have accrued, regardless of the outbreak. Although, there seems to a moot point at present on how the inability for a company to raise funds within the pandemic to pay off the debt which accrued prior to Covid-19 could affect this situation.
In Re a Company [2020] EWHC 1551 (Ch), ICC Judge Barber described (at para 44) this as a “threshold test” rather than something which must be proved on the balance of probabilities. The judge also emphasised that, under the test, Covid-19 must only be “a” cause of the company’s current financial difficulties. But the burden of proof is on the company (at para 40). Therefore, the importance of financial evidence here should be stressed. Filed accounts, management accounts and company projections which can chronicle Covid-19’s effects are paramount. In Re a Company it was proven that the financial intentions and funding drive had been frustrated by the onset of the pandemic in early March. Contemporaneous documents will likely be given much weight.
It will undoubtedly be very difficult for a creditor to show that this Covid-19 pandemic has not in some way had an effect on a company’s finances, especially due to the longevity of the pandemic and the lockdown restrictions which have been put in place. Although, in the case of Short Gardens LLB v London Borough of Camden Council [2020] EWHC 1001 (Ch), the court did refuse to grant an order, which would have restrained the presentation of a winding-up petition, because the debts that had been accrued by the company were not related to Covid-19. In that case, the debts were because of national non-domestic rates and the costs which arose from previous litigation.
Secondly, litigants in person should note the importance of reading a petition carefully. The new “coronavirus test” has to be set out within the written petition: Insolvency Practice Direction relating to the Corporate Insolvency and Governance Act 2020 ([2020] BCC 694], published on 3 July 2020. The winding up petition must contain a statement that:
- For matters s.123(1)(a)-(d) Insolvency Act 1986, written demands etc, then condition para.5(2) of Sch. 10 of the 2020 Act is met.
- For matters s.123(1)(e) or (2) Insolvency Act 1986, inability to pay debts as they fall due etc., condition para. 5(3) of Sch. 10 of the 2020 Act is met.
The logic of that rule means that a petition missing such a statement will be either be dismissed or at least amended before allowing to be given effect.
Thirdly, the procedure for these winding up petitions within the relevant period has changed. There will now be a non-attendance pre-trial review where the parties may serve documentation on within the relevant notice period (14 days) of the petition. This is the first opportunity for a LIP to dismiss the petition, as the court has to be satisfied that it is “likely” the test has been met (PD para 8.1). Whilst there is currently no judicial guidance on how judges will approach these hearings, we advise that attempting to comply and put as much evidence in the form of a witness statement before the court as early as possible is the prudent course of action. If you do not make an appearance for your company or if the court is satisfied the coronavirus test is met, it shall list the petition for a hearing in the full winding-up list or order a preliminary hearing with directions if the matter is more complex (PD para 7.1).
Fourthly, it has been well publicised that the 2020 Act introduces a “moratorium” process whereby various protections from creditors are given for the period of the moratorium. An independent monitor is appointed alongside who assists the directors in the process. It is key that litigants in person are aware that there is a presumption they may not obtain a moratorium for their company if there is an outstanding winding-up petition (i.e. presented and not determined): s.A3(1)(a) 2020 Act. However, a moratorium may still be obtained by the directors if permission from the court is granted. The test the court must apply is whether it is “satisfied” that the moratorium would have a better result for creditors “as a whole” than if the company was wound up (s.A3(5) 2020 Act). The usual documents must be lodged at court for such an application. This includes (s.A6):
- A notice from the directors that they wish to obtain a moratorium and also that the company is unable or likely to become unable to pay its debts.
- The statement from a qualified person, i.e. the proposed monitor, that they are qualified and consent to act. Further that the moratorium would, in their view, rescue the company as a going concern.
- A statement from the monitor that the company is eligible.
Lastly, on 2 October 2020, a new temporary insolvency practice direction was published, this will remain in force until the 31 March 2021. Per the Courts and Tribunals Judiciary website, they replace and extend the previous temporary insolvency practice direction, which came into force on 6 April 2020. Importantly, there has been ‘no substantive change’ to the procedures in the insolvency courts that were being followed prior to this new direction coming in.
The practice direction outlines how winding-up and bankruptcy petitions will be presented in the current circumstances. Any hearing shall be done remotely with the technology which the Court believes is appropriate. An E-mail address or telephone number should be provided to the Court in order to join the remote hearing. This should be done as soon as possible, and in any event, no later than 2 business days before the hearing date. If this is not done, then the company could run the risk of the Court making an order in its absence, which could include a winding-up order.
As ever, CO.IN will attempt to do as much as possible to assist those who find themselves before a court without representation. The new rules are complex, but with a guiding hand at a time which is already difficult then the process should be somewhat eased.
Company Insolvency Pro Bono Scheme 