The Fate of Winding Up Petitions – Re: A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406 (Ch)

Articles | Fri 24th Jul, 2020

On 1 June 2020, Morgan J granted ex parte application to restrain the presentation of a winding up petition by a landlord of its tenant company, a high street retailer.

The judgment can be read here.

The tenant had been required to close the premises from which it traded in accordance with the instructions from the Government in response to the Covid-19 pandemic. This resulted in a failure to pay rent and service charges.

The Landlord was unable to forfeit the lease due to Section 82 of the Coronavirus Act 2020. It therefore served a statutory demand in mid-April and subsequently e-filed a winding up petition. By the time of the hearing of the tenant company’s application, the court fee for the petition had not been paid and so the petition was not considered to have been presented yet.

The application to restrain the presentation of the petition was made on various grounds but focused on the provisions pertaining to winding up contained in Schedule 10 of the CIGB [see paragraphs 10 – 16 of the Judgment].

Amongst other provisions, the CIGB temporarily prevents creditors presenting winding up proceedings on or after 27 April 2020 on the basis of statutory demands served between 1 March 2020 to one month after the CIGB is enacted, unless the creditor can satisfy the court it has reasonable grounds for believing:

(1) coronavirus has not had a financial effect on the company; or

(2) the relevant ground (being the company’s inability to pay its debts) would apply even if coronavirus had not had a financial effect on the company.

The Judge placed considerable reliance on the fact that it was “most unlikely” that if the petition was presented, it would be heard before the CIGB came into force and that when enacted, the relevant provisions in Schedule 10 were to be regarded as having come into force on 27 April 2020.

In those circumstances, by the time the petition was heard, the Court’s decision would be taken pursuant to those provision. As a result, Morgan J reasoned at paragraph 18:

“This means that, on the hearing of the petition, a court must ask itself whether coronavirus has had a financial effect on the company before the presentation of the petition. If that is held to be the case, then the court can only wind up the company if it is satisfied that the facts on which the petition is based (under section 123(1) or (2)) would have arisen even if coronavirus had not had a financial effect on the company.”

Further:

• On the evidence, there was a strong case (at the lowest) that coronavirus had had a financial effect on the company before the presentation of the petition and, further, that the facts on which the petition would be based would not have arisen if coronavirus had not had a financial effect on the company [18]. The evidence also showed that the presentation of a petition which would ultimately fail would nonetheless have a seriously damaging effect on the company [19].

• The Judge held that when deciding whether to grant relief, the Court can take into account its assessment of the likelihood of a change in the law which would be relevant to its decision [24]. He also considered that the grant of an injunction to restrain the presentation of the petition is powerfully supported by the clear policy objectives of the CIG Bill [25].

Comment

The decision highlights the significance of the CIGB, not just for the elements which are to have retrospective effect but for the stringent conditions it imposes in respect of petitions and statutory demands.

The burden of establishing that the company subject to the petition falls within the narrow exceptions set out in Schedule 10 of the CIGB will lie with the petitioning creditor and it is likely to be a difficult one to discharge. It appears unlikely that it will be enough to simply show that a debt arose pre-Coronavirus.

It is also clear that attempting to get petitions presented before the coming into force of the CIGB is unlikely to be an effective tactic and such petitions will be liable to restraint. The Bill specifically addresses the fate of petitions presented since the end of April and this case endorses the ‘clear policy objectives’ behind the Bill, which it is safe to assume will be given significant weight by a Court considering any such petition.