Obtaining a Winding Up Order when the Corporate Insolvency and Governance Act 2020 applies retrospectively

Articles | Mon 27th Jul, 2020

Simon Newman of 1 Chancery Lane recently acted for a petitioner and obtained one of the first Winding Up Orders under the Corporate Insolvency and Governance Act 2020 (the 2020 Act).  The unusual retrospective applicability of the 2020 Act meant that the Petitioner had to satisfy requirements which were not in force at the time the Petition was issued; requirements which creditors had feared brought to an end (at least temporarily) the ability to threaten a company with insolvency if it is unable to pay a debt that is due.

Legislative Context

When the 2020 Act entered into force on 26 June 2020, debtors suffering from the effects of COVID-19 across the country breathed a huge sigh of relief.  That collective sigh was much louder than envisaged when the government announced its intention to introduce legislation to protect the high street from aggressive landlords, because the 2020 Act had a much broader application – namely to any debtor, not just high street businesses.

Creditors on the other hand, felt hard done by as a result of the introduction and scope of this legislation.  This feeling was particularly acute in light of the low bar that it appears the legislation set in respect of the Coronavirus impact test, the fact that the legislation was drafted to apply retrospectively to Petitions issued before it entered force, and the explanatory notes that indicated that creditors could be liable for the costs of a Petition issued prior the 2020 Act entering force.

Creditors will therefore be somewhat reassured to learn that in making one of the first Winding Up Orders in respect of a Petition which was issued prior to the entry into force of the 2020 Act, but to which it applied retrospectively, the courts have appeared to approach the issue robustly.

For a detailed explanation of the impact of the 2020 Act on the pursuit of a winding up order, the reader is directed to the note published by 1 Chancery Lane on 10 July 2020.

Obtaining a Winding Up Order after retrospective application of the 2020 Act

On 8 July 2020 the Petition[1] that came before Insolvency and Companies Court Judge Mullen had been issued on 1 May 2020, some 8 weeks before the 2020 Act came into force, but after the 27 April date from which the 2020 Act applied retrospectively.  As a result, the Petitioner could not have ensured that the Petition satisfied the requirements of the 2020 Act on its face, since they did not exist at the time of issue.

The Petition was contested by the Company. Counsel for the Petitioner had to therefore make submissions on the impact of the 2020 Act on the Petition; namely the substantive tests imposed in respect of  the Petitioner’s reasonable beliefs about the effect (or not) of coronavirus on the Company, and whether the court could be satisfied coronavirus had no impact on the Company or that the grounds for ordering a winding up would have existed regardless of the financial impact of coronavirus.

It was argued on behalf of the Petitioner that although the Petitioner, as assignee of the petition debt was only the creditor from the date of assignment in March 2020, the underlying assigned debt dated to April 2019 and thus significantly pre-dated any impact caused by coronavirus.  Further, having obtained the latest filed accounts shortly prior to the hearing, further submissions were made in respect of the financial position of the Company which showed the Company to be balance sheet insolvent as far back as 2018.

The Company made arguments as to the Petitioner’s status as a creditor; the assignor’s views of the winding up order sought; and made submissions, but was unable to properly develop or evidence them, on the impact of coronavirus on the Company.

By reply, it was argued on behalf of the Petitioner that none of these grounds amounted to a dispute as to the entitlement of the debt; there was nothing to substantiate any financial impact caused by coronavirus; and that the Company, despite being given the opportunity by the judge, had failed to indicate there was any real prospect of turn-around or being able to pay the debt.

The Judgment

Insolvency and Companies Court Judge Mullen ordered that the Company be wound up.

In doing so he recognised that the Petition was caught by the provisions and effect of the Corporate Governance and Insolvency Act 2020 and that the Petitioner could only succeed if the creditor had reasonable grounds for believing that coronavirus has not had a financial effect on the company, or if the grounds for winding up would have arisen even if coronavirus had not had a financial effect on the Company.

ICC Judge Mullen further acknowledged that the Court can only order a winding up in circumstances where it appears that coronavirus has had no effect or if it is satisfied that the grounds for winding up would have arisen even if coronavirus had not had any financial effect.

ICC Judge Mullen concluded that the debt fell due in April 2019 and had been assigned to the Petitioner by the original creditor.  He found that it was not disputed that it had not been paid for a year and accepted that the last filed accounts showed it to be balance sheet insolvent as far back as 2018.  Accordingly, the judge held that the creditor did have reasonable grounds for considering that coronavirus was not responsible for any financial effect, as the undisputed debt would otherwise have been paid.

He held that, despite the Company’s submissions that the petition should be dismissed or adjourned because it was confident matters would get back on track and it would be able to pay the debt in a reasonable time; he was not satisfied that it was reasonable to seek to pay it off over an extended period.  Significantly, ICC Judge Mullen held that he was not satisfied that there was any evidence before him on which he could be satisfied that there was any prospect of repayment.

Next the judge went on to consider the restrictions imposed on the court under the 2020 Act when considering whether to make a Winding Up Order.

ICC Judge Mullen decided that he was not satisfied that coronavirus had had a financial effect on the Company.  Instead he found that it was quite clear in the circumstances that the grounds for winding up would have arisen in any event.  He concluded that the debt was very overdue and that if coronavirus had not intervened, there was nothing that he had seen to suggest that the position would be any different.  As a result, the judge was satisfied that the grounds for ordering a winding up would apply even if coronavirus had not had any financial effect on the Company. For those reasons he made the usual compulsory winding up order.

Lessons

This decision is likely to come as a welcome relief to creditors who feel that in passing the 2020 Act the government have completely ignored that they themselves have cash flow issues and their debtors should not simply be able to refuse to pay undisputed debts on vague coronavirus-based assertion.  The robust approach taken by the court in this instance will be welcomed.

Significantly, given the retrospective application of the 2020 Act, it appears that it will not matter whether or not a creditor had the subjective belief about the impact of coronavirus at the time the Petition was presented, the important thing will be that the belief can be demonstrated by the time of the hearing.

Whilst each petition will turn on its facts, the way the hearing was conducted demonstrates the importance of a familiarity with the petition debt and the financial position of the company.  Companies that wish to resist petitions will be wise to seek to substantiate any assertions as to the impact of coronavirus.

Possibly the greatest lesson from this decision is that coronavirus will not be a panacea for debtors when faced with winding up petitions, and the 2020 Act does not bring to an end the ability to obtain a Winding Up Order in appropriate circumstances.

For anyone facing or pursuing a winding up petition members of 1 Chancery Lane are on hand to provide assistance with the impact of the 2020 Act on the winding up process.

[1] RE: Tundrill Ltd – CR-2020-002351