Corporate Insolvency and Governance Bill: advertisement of winding up petition restrained before Bill enacted

United Kingdom

Last week, in Re a Company (Application to Restrain Advertisement) [2020] EWHC 1551 (Ch) the High Court restrained the advertisement of a winding up petition on grounds of the impending changes to insolvency legislation, which are intended to have a retrospective effect. The Corporate Insolvency and Governance Bill (the “CIG Bill”) is being introduced to protect debtors affected by the COVID-19 pandemic. Notably, it makes clear that the use of statutory demands (made between 1 March 2020 and 30 September 2020 and winding up petitions presented from Monday 27th April, through to 30 September 2020 will be prohibited where a company cannot pay its bills due to the coronavirus pandemic. (For a full analysis of the bill in its current form, please click here). This decision marks one of a number of recent test cases in which the courts have sought to give effect to the reforms before they are formally enacted, which is no doubt reassuring for businesses facing financial difficulty as a result of the pandemic.

Background to the case

A company (the “Company”), issued an application to (i) restrain the advertisement of a winding up petition in the sum of £160,697 by the First Respondent (the “Petitioner”) and (ii) to restrain the presentation of further winding up petitions by the Second and Third Respondents in the respective approximate sums of £131,000 and £81,000. The judgment is anonymised to protect the Company’s interests.

The Company’s application was originally based on three grounds, two of which were dismissed in the first substantive hearing. ICC Judge Barber therefore considered the third ground of opposition in this instance, being that a winding up would be oppressive and unfair given the impending changes to insolvency legislation which are intended to have retrospective effect.

Analysis

The court echoed the sentiments of Mr Justice Morgan as expressed recently in Re a Company (Injunction to Restrain Presentation of a Petition) [2020] EWHC 1406, which also concerned the CIG Bill. ICC Judge Barber shared Mr Justice Morgan’s “high degree of confidence that Schedule 10 will be enacted in more or less its current form”. Accordingly, this judgment considered Schedule 10 of the CIG Bill in detail.

Paragraph 1 Schedule 10

The Company submitted that Paragraph 1 of Schedule 10, entitled “Prohibition of petitions on basis of statutory demands” was fatal to the winding up petition. The paragraph precludes the presentation of a petition for the winding up of a registered company on or after 27 April 2020 on the grounds of non-compliance with a statutory demand (s.123(1)(a) Insolvency Act 1986), where the demand in question is served on a date between 1 March 2020 and the later of 30 June 2020 and one month after Schedule 10 comes into force.

The respondents contended that because the Petitioner relied upon both s.123(1)(a) and s.123(1)(e), Paragraph 1 would not be fatal to the petition. s.123(1)(e) Insolvency Act 1986 provides that a company is deemed unable to pay its debts if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. Critically, it was the court’s reading that whilst the petition currently did not unequivocally rely on s.123(1)(e), the Petitioner would be entitled to seek permission to amend the petition to correct that problem. Upon the Petitioner’s confirmation that it would seek such an amendment and in consideration of the likelihood that such permission would be granted at this early stage, the court was satisfied that paragraph 1 of Schedule 10 would be not fatal to the petition. However, other aspects of Schedule 10 were still to be considered.

Paragraph 2 Schedule 10

The court then focused on Paragraph 2 of Schedule 10, entitled “restriction on winding-up petitions: registered companies”.  Given the Petitioner’s intended reliance on s.123(1)(e), the relevant sub-paragraphs of Schedule 10 were 2(3) and (4), which provide as follows:

  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 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.
  2. The condition referred to in sub-paragraph (3) is that the creditor has reasonable grounds for believing that –
    1. coronavirus has not had a financial effect on the company, or
    2. the relevant ground would apply even if coronavirus had not had a financial effect on the company.

It was ICC Judge Barber’s view that the Petitioner was able to satisfy the “reasonable grounds” requirement for believing that s.123(1)(e) would apply, even where coronavirus did not have a financial effect on the Company. The court considered several factors in its decision, notably the following:

  1. the repayment date provided under the terms of the Agreement was on 22 January 2019, long before COVID-19 hit;
  2. the Company did not repay any part of the debt on the repayment date, instead reaching an agreement with the Petitioner that the Petitioner would not call in the debt as long as it was serviced with twice monthly interest payments;
  3. the Company was unable to keep to its obligations to service the debt twice a month. This meant that the debt became repayable on demand;
  4. no interest payments were offered or received thereafter, suggesting ongoing significant cashflow problems;
  5. the Company failed to respond to the Petitioner’s repeated requests for repayment;
  6. the Company similarly failed to respond to the Second and Third Respondent’s repeated requests for repayment; and
  7. it was only on 16 April, 3 months after payment of the petition debt was formally demanded by a letter dated 24 January 2020, that the Company circulated correspondence blaming the pandemic for any delay in repayment and asking for patience. In the court’s view, this letter could reasonably be seen as something of an opportunistic attempt to jump on the ‘COVID-19 bandwagon’ and it would itself be insufficient to render the Petitioner's grounds unreasonable.

As such, the question hinged on whether Paragraph 5 of Schedule 10 of the CIG Bill would, if enacted, permit the petition to proceed. This paragraph restricts the circumstances in which a winding up order may be made against a company. 

Paragraph 5 Schedule 10

In this case, the conditions set out in paragraph 5(1)(a) and (b) were clearly satisfied and not controversial. Critically, it was ICC Judge Barber’s view that paragraph 5(1)(c), which states that paragraph 5 applies where “it appears to the court that coronavirus had a financial effect on the company before the presentation of the petition”, was a low threshold and that it was satisfied in this circumstance, notwithstanding the Judge’s reservations as to the quality of the evidence adduced by the Company.  The court’s view was that the evidential burden of showing that coronavirus had a financial effect on the Company before the presentation of the petition was on the Company, not on the Petitioner. The court clarified that the requirement was “simply that 'a' financial effect must be shown: it is not a requirement that the pandemic be shown to be the (or even a) cause of the company's insolvency.”

Under paragraph 5(3), the Petitioner was also required to show that even if the financial effect of coronavirus was ignored, the Company would still be insolvent within the meaning of s.123(1)(e). On the evidence, the court could not be satisfied that s.123(1)(e) would apply even if coronavirus had not had a financial effect on the Company. It was the court’s view that there was no real chance of a winding up order being made on this petition. Moreover, even where a winding up order was made, paragraph 7 of the CIG Bill (assuming it is enacted) would ultimately render the winding up void.

Oppressive and unfair to allow advertisement

Finally, the court had to consider whether, in the light of the above, it would be oppressive and unfair to allow advertisement of the winding up petition. Given that the Company was in the process of a restructuring exercise with its unsecured creditors, the court held that the adverse publicity surrounding the presentation of a winding up petition would have a detrimental effect on the Company. Further, the advertisement of a winding up petition served no purpose if there was no real chance that a winding up order would be made in the event.

Conclusions

The court thereby granted an injunction restraining advertisement. Importantly, the injunction was held to be in place until further order, given that the CIG Bill was not yet law. The Petitioner was also at liberty to apply to lift the restraint on advertisement should it be able to produce further evidence demonstrating that s.123(1)(e) would apply, even if coronavirus had not had a financial effect on the Company. The court also indicated that it would restrain the presentation of petitions by the Second and Third Respondents if suitable undertakings were not offered.

Summary

This is an important test case in the interpretation of the CIG Bill, which will undoubtedly influence the courts’ treatment of winding-up petitions as the COVID-19 pandemic continues, even before the CIG Bill formally becomes law. Key takeaways relate to the low threshold of paragraph 5(1)(c), which, provided all other conditions of paragraph 5 are satisfied, offers a safety net for those who do not satisfy other criteria found in Schedule 10. This case highlights that petitioners should be mindful of the bases on which petitions are presented, given the prohibition on petitions based on s.123(1)(a), which could have been fatal in the present case.

Co-authored by James Highfield