HomeFWJ TakeawayResourcesCorporate Insolvency and Governance Act 2020 – restrictions on the use of winding up petitions

The Corporate Insolvency and Governance Bill has become an Act having received Royal Assent on 25 June 2020 and comes as a direct result of the COVID-19 emergency.

The Act looks to reduce the number of corporate insolvencies stemming from COVID-19 and provide reassurance and protection for limited companies that are currently suffering. However, it could, at the same time, also directly affect the ability of a company or individual to recover debts owed to them. Here we look at how the Act could restrict the use of winding up petitions, the applications often used by creditors to close companies that cannot repay their debts.

The Act prohibits the presentation of winding up petitions in the following instances:

  • Where a petition is presented on or after 27 April 2020 upon reliance of a statutory demand served upon a business during the “Relevant Period” (1 March 2020 to 30 September 2020)
  • On the basis of a company’s inability to pay its debts, unless the creditor has reasonable belief that: (a) The business has not been financially impacted by the coronavirus; or (b) The relevant ground (as relied upon in the Insolvency Act to issue a petition) would apply even if the coronavirus has not had a financial effect on the company.

Determining whether a debtor company been financially affected by the coronavirus

The threshold for this is low in that if the company is in a worse financial position as a result of the coronavirus then a creditor would be prevented from bringing a winding up petition against the company. In the recent decision of Re a Company (Application to Restrain Advertisement) [2020] EWHC 1551 (Ch) (16 June 2020) the court stated that it was not a requirement that the pandemic be shown to be either the sole or contributory cause the company’s insolvency.

  • On making the petition the onus of proof is on the creditor to demonstrate that a debtor company has not been financially affected when presenting the petition.
  • This could be a difficult hurdle to get over, particularly in light of the widespread damage COVID-19 has already had on the economy, both on a general and industry specific level.
  • Added to this is the lack of “inside information” a creditor actually has about any of its own customers (e.g. access to management accounts etc) which one might need to help evidence this point.

It would also appear that the court will look at this aspect before deciding whether the petition will proceed at all. The Bill indicates that petitions need to include new wording in them to the effect that the petitioner believes that COVID-19 has not had an impact on the company’s ability to pay the debt, although it is unclear as yet how much information needs to be included to support this contention. But what is clear is that creditors will need to consider this point properly in advance of issuing a petition and it should be remembered that the petition must be supported with a witness statement, including the usual statement of truth.

Evidence which might help get over this hurdle would include the age of the debt, history of non-payment and/or reliance on a court judgment, where that judgment was obtained pre COVID-19.

Proving that the relevant ground would apply even if the coronavirus has not had a financial effect on the debtor company

If a creditor is unable to satisfy the test in (a), then an application may still be successful if a creditor is able to demonstrate that the facts by reference to which the ground for winding up applies would have arisen even if coronavirus had not had a financial effect on the company. Again, it looks like the evidential burden (at least at the outset) is on the petitioner. A creditor could normally rely upon Section 123 (1) (e) of the Insolvency Act, that the company is unable to pay its debts as and when they fall due.

In the recent decision of Re a Company (Application to Restrain Advertisement) [2020] EWHC 1551 (Ch) (16 June 2020) ICC Judge Barber determined that the petitioner could satisfy this provision to permit the petition to proceed on the basis of a wealth of evidence showing the age of the debt, the company’s continued failure to honour promises to pay or repayment schedules and the correspondence between the parties leading to the petition.

Winding up orders made between 27 April 2020 and 26 June 2020

If a winding up order was made during this time then:

  • It would deemed void if the exceptions above were not met; and
  • The court will give appropriate directions to the liquidator/Official Receiver to restore the company to the pre-petition position.

For further guidance on debt recovery or any aspect of the Corporate Insolvency Governance Act – please get in touch with Shona Houghton who will be happy to help you.

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