As widely anticipated, the UK Government has extended its restrictions on winding up petitions until 30 June 2021, pursuant to Schedule 10 of the Corporate Insolvency and Governance Act 2020 (“CIGA”). CIGA came into force on 26 June 2020 to provide flexibility and breathing space to businesses who have been impacted by the Coronavirus pandemic.
In order to present a winding up petition at court, creditors are now tasked with overcoming the so called “Coronavirus test”. For more information on the Coronavirus test, please see our previous blog on the subject here.
Is it enough to defend a winding up petition by simply asserting that Covid-19 has affected the company?
In the recent case of PGH Investments Ltd – v – Ewing , Deputy ICC Judge Passfield provided a useful understanding on threshold level for the Coronavirus test. The decision was interesting as the threshold set was higher than some people might have understood.
Whilst the outcome of this case predominantly considered the contractual interpretation of a share purchase and loan assignment agreement, the judge also discussed the practical implications of the Coronavirus test.
The evidential burden of showing that Covid-19 has worsened a company’s financial position before the presentation of the petition is on the company. Should this be established, the evidential burden shifts to the petitioner to show that even if the financial effect of the coronavirus is ignored, the company would still be unable to pay its debts as they fall due.
In this case, it was the company’s position that the coronavirus pandemic had had a dramatic indirect financial effect on
- the liquidity investment worldwide and during these uncertain times;
- networking due to the travel restrictions i.e. it is difficult to find investors;
- the company’s day-to-day operations of the business, its development and the revenue;
- the company’s ability to trade; and
- its ability to source funds
However, the company failed to adduce any documentary evidence to properly support of these assertions and as such, the grounds of defence were rejected by the court.
Since the implementation of CIGA, it has been well known that there was a relatively low threshold for the Coronavirus test.
Whilst the Judge in this case agreed that the test will consider the direct and indirect effect that Covid-19 has on a business, it is clear that any attempt to rely on Schedule 10 of the Act will not be successful without adequate documentary evidence to support the same.