May 12, 2021
What is the coronavirus test for winding up a company?
With the coming into force of the Corporate Insolvency and Governance Act 2020 (“CIGA”) on 26 June 2020, temporary restrictions were imposed on the presentation of creditors’ winding-up petitions in circumstances where, but for the financial impact caused by the coronavirus, the company would be able to pay its debts.
How has recent case law impacted the interpretation of the coronavirus test?
The original limitations on presenting winding up petitions was intended to run until 30 September 2020, it has now been extended and is set to end on 30 June 2021.
What are the relevant cases for the coronavirus test?
- Re a Company (Application to Restrain Advertisement of a Winding-Up Petition) [2020] BCC 773
- Newman v Templar Corp Ltd [2020] EWHC 3740 (Ch)
- PGH Investments v Ewing [2021] EWHC 533 (Ch)
Where can I learn more about the coronavirus test for winding-up a company?
4 Stone Buildings has developed a concise and regularly updated ebook which provides a range of information including the topic of the coronavirus test for winding up a company. It can be found on the 4 Stone Buildings website HERE.
The Coronavirus Test update:
Under paragraphs 2 and 3 of Schedule 10 of CIGA creditors have been retrospectively precluded from presenting winding up petitions unless they have reasonable grounds for believing that:
- coronavirus has not had a financial effect on the company; or
- for petitions:
- under s. 123(1)(a)-(d), Insolvency Act 1986 (“IA 1986”): the facts by reference to which the relevant ground applies, upon which the petition is based, would have arisen in any event even if coronavirus had not had a financial effect on the company;
- under s. 123(1)(e) or s. 123(2), IA 1986: the relevant ground would apply even if coronavirus had not had a financial effect on the company;
Similarly under paragraphs 5 and 6 of Schedule 10 of CIGA the court may only wind-up a company if it is satisfied that: (i) for petitions under s. 123(1)(a)-(d), IA 1986, the facts by reference to which the ground relied on for winding-up applies would have arisen even if coronavirus had not had a financial effect on the company; and (ii) for petitions under s. 123(1)(e) or s. 123(2), IA 1986, the ground relied on for winding-up would apply even if coronavirus had not had a financial effect on the company. These requirements at paragraph 5 and 6 of Schedule 10 are commonly referred as the “coronavirus test”, having been defined as such in the Practice Direction relating to the Corporate Insolvency and Governance Act 2020 (the “CIGA 2020 Practice Direction”). More details as to the procedural requirements set out in CIGA and the CIGA 2020 Practice Direction can be found in chapter 2 of 4 Stone Buildings ebook “Litigation in the Time of Covid-19.”
On CIGA’s enactment the relevant period in which the coronavirus test applied was intended to run from 17 April to 30 September 2020. The relevant period has been extended on three occasions, most recently on 26 March 2021, and is currently set to end on 30 June 2021. It remains unclear whether a further extension of the relevant period will be made.
In the period of over a year in which the coronavirus test has been in force, there have been no judicial decisions at a binding level on its interpretation and reported cases have been sparse. These few reported cases are detailed below.
Re a Company (Application to Restrain Advertisement of a Winding-Up Petition) [2020] BCC 773
This decision pre-dates the enactment of CIGA. An application was made by the company to restrain advertisement of a winding-petition on the basis that the act being brought into force, would retroactively prevent the petition form proceeding. ICC Judge Barber granted the application, on the basis that the coronavirus test under paragraph 5 of Schedule 10 of CIGA, would not have been satisfied on the evidence were the act in force.
The court’s reasoning is set out at paragraphs [37]-[47], and gives guidance as what has to be shown for the coronavirus test to be satisfied. Firstly, the court must consider under paragraph 5(1)(c) whether “it appeared to the court that coronavirus had a financial effect on the company before the presentation of the petition.” The initial evidential burden in this regard is on the company, but the evidential threshold to be met is a low one of establishing a prima facie case.
Following a prima-facie case being shown the burden then switches to the petitioner to demonstrate under paragraph 5(3) that the ground of which the petition is brought would apply “even if coronavirus had not had a financial effect on the company.”
Newman v Templar Corp Ltd [2020] EWHC 3740 (Ch)
In this decision Deputy ICC Judge Agnello QC held that the coronavirus test was satisfied and that proceedings should continue to a hearing of the petition itself. The petition concerned a “hopelessly insolvent” company, that had been hopelessly insolvent for a considerable period of time before the outbreak of coronavirus. It was argued that coronavirus had a financial effect on the company, by reference to an investor who would have made investments into the company to the satisfaction of the petitioner’s debts were it not for the travel restrictions imposed by Covid.
The court stated that the two-stage test set out by ICC Judge Barber in Re a Company [2020] BCC 773, was now the “settled approach” to the coronavirus test, and rejected submissions by counsel for the petitioner that the decision was incorrect. The court held that the company’s evidence in this regard failed to discharge the low threshold of demonstrating a prima facie case for the purposes of paragraph 5(1)(c) of Schedule 10 of CIGA. This was because on the evidence, there was a “litany of broken promises” regarding the alleged investor bringing money into the company, prior to the outbreak of coronavirus. Beyond bare assertion, there was nothing on the evidence to explain why the alleged investor would have suddenly been willing to invest come the imposition travel restrictions, having been previously unwilling to do so.
PGH Investments v Ewing [2021] EWHC 533 (Ch)
This decision concerned an application by the company for the dismissal or restraining of advertising of the winding-up petition against it. The company argued both that the debt was contested on substantial grounds, and that the coronavirus test was not met. Deputy ICC Judge Passfield found that the debt was disputed on substantial grounds and went on to consider obiter if the coronavirus test was met at paragraphs [64]-[78] of the judgment.
The company had made bare assertions, largely unsupported by documentary evidence that coronavirus had a financial effect on it, on the basis of the pandemic’s worldwide impact on liquidity investment, general travel restrictions, and impact on day-to-day operations. The judge held applying the two-stage test in Re a Company [2020] BCC 773, that the company had not demonstrated a prima facie case for the purposes of paragraph 5(1)(c) of Schedule 10 of CIGA. The lack of documentary evidence was the key factor in this regard.
The court also provided guidance as to what could be considered a “financial effect” on the company. It was argued by the petitioner that as the company was a holding company that did not trade, coronavirus could not have had a direct impact on its day to day operations. The judge however, held that what constitutes a financial effect should be interpreted broadly and can include indirect financial impact on a company’s finances.
What is the consequence of these decisions?
While each petition will to a large extent turn on its own facts, these cases nonetheless provide useful guidance as to the court’s general approach to the coronavirus test. Parties to winding up petitions presented in the relevant period, should expect the courts to apply the two stage-test set out by ICC Judge Barber in Re a Company [2020] BCC 773. A company resisting a petition on the grounds that the coronavirus test is not met, should ensure that documentary evidence supporting their assertions is adduced, as bare assertions will likely not be sufficient to demonstrate a prima facie case at the first stage. Further, the court will take a broad approach in assessing the evidence to what constitutes a financial effect on the company, and arguments based on fine or technical distinctions in this regard are unlikely to succeed.
About the author:
Hossein joined Chambers in October 2020 following completion of his pupillage. He is building a commercial chancery practice across all areas of work done by Chambers. Prior to joining Chambers, Hossein worked as a paralegal at a boutique commercial litigation firm, and as an intern at the United Nations Commission on International Trade Law (UNCITRAL).
View Hossein’s profile HERE.
