Introduction[1]
1. On 16 August 2021, the High Court handed down a judgment in the case of IN Re A Company and in the matter of the Insolvency Act 1986, which looked at the application of the Coronavirus test, giving insight as to when the test may be met.
Case Summary
2. The petitioner in this case sought the winding up of “C Limited”. The petition debt arose out of a contract dated 4 September 2020. As part of the terms of the contract, the Petitioner paid the Company £750,000 in which it was agreed that, within 60 days, the company would pay the Petitioner £2 million if a standby letter of creditor was monetised or £950,000 if the monetisation failed. The monetisation did eventually fail, but the Company had paid only £50,000 when the sum of £950,000 was actually due.
3. The hearing in which the High Court heard was whether the “Coronavirus Test” had been met. The law on this is to be found in the recent Corporate Insolvency and Governance Act 2020. This new legislation was explored in depth in both Re A Company [2020] BCC 773 and PGH Investments Limited v Ewing [2021].
4. The Judge referred to two key aspects of the Corporate Insolvency and Governance Act, specifically the Insolvency Practice Direction.
5. First, Paragraph 8.1, if the court is satisfied that a winding up order can be made, then the Petition can then be advertised and listed for hearing, but if the court isn’t satisfied it will need to dismiss the petition.
6. Second, the Coronavirus test, in paragraph 1.1(3):
“the coronavirus test” means whether:
In the case of a petition to wind up a registered company on a ground specified in section 123(1)(a) to (d) of the 1986 Act that the condition in paragraph 5(2) of Schedule 10 to the 2020 Act is met;
In the case of a petition to wind up a registered company on a ground specified in section 123(1)(e) or (2) of the 1986 Act that the condition in paragraph 5(3) of Schedule 10 to the 2020 Act is met;
In the case of a petition to wind up an unregistered company on a ground specified in section 222, 223, or 224(1)(a) to (c) of the 1986 Act that the condition in paragraph 6(2) of Schedule 10 to the 2020 Act is met; or
In the case of a petition to wind up an unregistered company on a ground specified in section 224(1)(d) or (2) of the 1986 Act that the condition in paragraph 6(3) of Schedule 10 to the 2020 Act is met;
What is the thinking behind this provision?
7. The Judge went through various reasons as to why the Act was made and what its purpose should be when interpreting various provisions of it.
8. One of the main purposes behind it was to allow the court to wind up a company, only if it is satisfied that Coronavirus has not had a financial effect on it. This led to the next question of how does the court determine whether coronavirus has had a financial effect on the company? This is “if the company’s financial position worsens in consequence of, or for reasons relating to coronavirus”.
The limbs to the test incorporated in the Act
9. Limb One: that coronavirus had a financial effect on the company before presentation of the petition
10. Limb Two: that the ground for winding up the company, namely that it is unable to pay its debts as they fall due (i.e. the ground under s.123(1)(e) Insolvency Act 1986), would apply even if coronavirus had not had a financial effect on the company
Who does the evidential burden lie on to show coronavirus has had a financial effect?
11. The evidential burden lies with the Company; as per ICC Judge Barber in Re A Company, he noted that the Company needed only to establish a prima facie case. thereafter, if this is satisfied, the burden would shift to the petition to show that even if the financial effect of coronavirus were ignored the company would still be unable to pay its debts as they fell due. In essence, the threshold is low.
12. The Companies sought to have the order dismissed under two main pieces of evidence:
- Why the deal underlying the contractual obligation was not completed.
- The company’s difficult financial position as a result of coronavirus more generally.
13. There was various evidence adduced where there was “concrete examples” of disruption to the company’s normal business.
14. There was also another matter in which the company heavily relied on, which affected its ability to pay the petition debt, at present. The petition was served on 22 February 2021. Three days later, a director of the Petitioner contacted HypoSwiss (the Company held a bank account with this Swiss Bank), the director justified his actions to prevent the company dissipating funds. This disclosure to the bank had had reputational effects on the Company as this became widely known in Geneva, which has made it difficult to make new clients and dealings with existing ones. But for this, the Company claims it would have been in a much better position.
Arguments by the Parties:
15. Counsel for the Petitioner contended that the evidence relied on by the Company was insufficient:
- Lack of straight dealing on the part of the company;
- There was always a risk that the transaction might not complete, hence the inclusion of alternative obligations within the contract (one in the event of completion and the other in the event of non-completion)
- Much of the evidence relied on by the company takes the form of unsupported or inadequately supported assertions, which cannot be sufficient to discharge the burden of proof.
- Furthermore, if the Company’s financial position had in fact worsened as a result of Coronavirus, then the Company could have adduced evidence of annual accounts, management accounts or other records comparing the company’s financial state pre and post pandemic, but evidence regarding this was limited. The Judge noted that the Company was not obliged to adduce this evidence, even if it would have been helpful and that ultimately this was a risk that the Petitioner accepted when it decided to present its petition in the current legal and economic climate. Accordingly, adverse inferences will not be drawn to such a failure. Importantly the judge refused to rule on the evidence that will be required to demonstrate a worsening comparative position in consequence of or for reasons relating to coronavirus, it will be something that will vary from case to case.
The Court’s Decision
16. Despite the contentions, the judge held that prima facie coronavirus had adversely affected the company’s ability to repay the debts, based on various evidence that was adduced. He noted again the low threshold imposed in this case, with the Company’s current cash flow insolvency appears to be the result in whole, or in part of, problems arising from the pandemic.
17. Furthermore, there is evidence of balance sheet insolvency (net liabilities of £513 as at January 2020), of which evidence is now over a year old, of which the sum was small and the second limb under consideration is to do with liability to pay rather than balance sheet solvency, therefore the second limb was satisfied, in the Company’s favour.
Conclusion
This is yet another example of the “Coronavirus test” not being met with the consequence of the petition being dismissed, highlighting the various difficulties of being able to present a petition at the current time based on the restrictions embedded within the temporary measures brought in by the court.
[1] For the purposes of this article, “the Company” will be in reference to the debtor of the petition and “the Petitioner” will be in reference to the creditor.
Company Insolvency Pro Bono Scheme 