Re A Company (Application To Restrain Advertisement) [2020] EWHC 1551 (Ch)

Frances CoulsonSenior & Managing Partner, Head of Litigation & Insolvency, Moon Beever

This judgment is the latest contribution to what is likely to become a growing body of law on insolvency in a time of plague (or at least Covid-19).

In this case a winding up petition was presented on 1 May 2020 following service on 27 March 2020 of a statutory demand claiming £160,697 in respect of debts and interest said to arise under a loan agreement made in 2018. The petition was listed to be heard on 17 June 2020. The company applied for an injunction to restrain advertisement and continued prosecution of the petition initially on three grounds, but as a result of a directions hearing the parties agreed that the court would need to determine four issues:

 

 

(1) whether the provisions of Part One (paragraph 1) of Schedule 10 to the Corporate Insolvency and Governance Bill would, if enacted, permit the petition to proceed;

(2) whether the provisions of Part Two (paragraphs 2 to 21) of Schedule 10 to the Bill would, if enacted, permit the petition to proceed;

(3) whether the court should factor the provisions of the Bill into the exercise of its discretion in circumstances where the Bill had not yet been enacted; and

(4) whether, in light of the foregoing, in the exercise of the court’s discretion, it would be oppressive and unfair to wind up the company given the proposed changes to the law and the retrospective nature of some of those changes.

 

Paragraph 1 of Schedule 10 (“Prohibition of petitions on basis of statutory demands”) provides that no petition for the winding up of a company may be presented under s.124 of the 1986 Act on or after 27 April 2020 for non-compliance with a statutory demand where the statutory demand was served between 1 March 2020 and the later of 30 June 2020 and one month after the coming into force of Schedule 10. Paragraph 1 of Schedule 10 further provides that it is to be regarded as having come into force on 27 April 2020.

On this, the first issue, ICC Judge Barber noted that in this case the creditor could rely not only on a statutory demand but also on a letter of demand made in January 2020, a fact which could be accommodated by amending the petition so as to obviate the necessity to rely on the statutory demand. Accordingly there was no basis for granting the company relief.

The company failed on the second issue too (paragraph 2 of Schedule 10 imposes a restriction on the use of winding-up petitions unless the petitioner can show that the coronavirus pandemic has not affected the company).  The judge noted that, “For the purposes of satisfying this test, the Petitioner must show that, as at the date of presentation, it had reasonable grounds for believing (1) that coronavirus has not had a financial effect on the Company (para 2(4)(a)) or (2) that the relevant ground (in this case s.123(1)(e)) would apply even if coronavirus had not had a financial effect on the Company (para 2(4)(b))”. She noted that few petitioners would be able to satisfy paragraph 2(4)(a), and indeed the petitioner in this case could not do so either. She went on to say, however, that in her view the petitioner did satisfy paragraph 2(4)(b), giving eight reasons why, including that the repayment date provided under the terms of the agreement was 120 days from the date of the loan agreement. So the loan was  due for repayment on 22 January 2019, long before the virus manifested itself.

 

She then turned to the question whether paragraph 5 of Schedule 10 to the Bill would, if enacted, permit the petition to proceed. (Paragraph 5 of Schedule 10 restricts the circumstances in which a winding up order may be made against a company.) She held that in this case the conditions set out in paragraph 5(1)(a) and (b) were satisfied. The petition was presented in the relevant period, and the company was deemed unable to pay its debts on a ground specified in section 123(1) of the 1986 Act. In such circumstances, at the hearing of the petition, the court would now have to ask itself whether “it appeared to the court” that coronavirus had had a financial effect on the company before the presentation of the petition.

In spite of reservations about the quality of the company’s evidence she concluded that the company had met the threshold requirements of paragraph 5(1)(c). Importantly, she held,

 

 

“This is clearly intended to be a low threshold; the requirement is 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. Moreover the language of this provision, which requires only that it should ‘appear’ to the court that coronavirus had ‘a’ financial effect on the company before presentation of the petition, is in marked contrast to that employed in paragraph 5(3), where the court is required to be ‘satisfied’ of given matters. The term ‘appears’ must be intended to denote a lower threshold than ‘satisfied’. The evidential burden on the Company for these purposes must be to establish a prima facie case, rather than to prove the ‘financial effect’ relied upon on a balance of probabilities. Applying these principles, there is in my judgment adequate evidence before me that a funding drive was underway by late December 2019/early January 2020 which was stopped in its tracks by the onset of the pandemic. “

 

There was in those circumstances, the judge concluded, no real likelihood of a winding up order being made on the petition (assuming that paragraph 5(3) actually came into force). That, coupled with the fact that, even if a winding up order were made on the evidence as it stood, paragraph 7 of the Bill (if brought into force) would render the winding up order void, lead to the company succeeding on the third issue.

 

ICC Judge Barber disposed of the fourth issue crisply in one brief paragraph:

 

 

“The court must next ask itself whether, in the light of the foregoing, it would be oppressive and unfair to allow advertisement. In my judgment, on the evidence as it stands, it would be oppressive and unfair to allow advertisement. The Applicant is in the process of engaging in a restructuring exercise with its unsecured creditors by way of a scheme of arrangement under Part 26 of the Companies Act 2006 involving a debt for equity swap. The adverse publicity surrounding the presentation of a winding up petition at this commercially sensitive time would plainly be detrimental to the Company, and would serve no purpose if (as is currently the case on the evidence as it stands, assuming that the CIG Bill is made law) there is no real chance that a winding up order will be made”.

 

The judge accordingly granted an injunction restraining advertisement on terms that the company provided a cross-undertaking in damages. However, in the light of the fact that the Bill had not yet been passed and “indications during the course of the hearing…that there may well be further material available which has not yet been adduced in evidence on the issue of whether section 123(1)(e) would apply even if coronavirus had not had a financial effect on the Company,” she made the injunction until further order with liberty to the petitioner to apply to lift it on production of further evidence.

The judgment is fact specific, but it contains a good analysis of the proposed legislation and gives some flavour of how the courts are likely to treat winding up petitions generally as well as applications for injunctions while the Corporate Insolvency and Governance Bill is being considered and when it becomes an Act.

 

Stephen Baister