Winding Up Petition – Interpreting the Corporate Insolvency and Governance Act 2020

The recent case of PGH Investments Ltd v Sean Ewing [2021] EWHC 533 (Ch), heard before Deputy Insolvency and Companies Court Judge Passfield, has served as helpful guidance to practitioners on how Schedule 10 of the Corporate Insolvency and Governance Act 2020 (“CIGA 2020”) is to be interpreted.

In this case, Mr Ewing presented a winding up petition against PGH Investments Ltd (“PGH”) seeking recovery of £825,000 which Mr Ewing alleged was due to him, pursuant to a Share Purchase and Loan Assignment Agreement. PGH brought an application to dismiss the winding up petition or, in the alternative, an order to prevent Mr Ewing from advertising the winding up petition.

In dealing with the Application, the Court had to consider the following aspects:
1. Was the alleged debt due and owing to Mr Ewing and, if so,
2. Was the company unable to pay its debts as and when they fall due, with coronavirus having a financial effect on the company, prior to the petition being presented.

Schedule 10 of CIGA 2020 sets out a restriction on winding up orders being made against registered companies. This is often referred to as ‘the coronavirus test’. This restriction applies where:
a) A creditor presents a petition for the winding up of a company during the ‘relevant period’,
b) The company is deemed unable to pay its debts as and when they fall due, and
c) It appears to the Court that coronavirus has had a financial effect on the company before presentation of the petition.

The Court may only make an order to wind up the company if it is satisfied that the company would be unable to pay its debts as they fall due, even if coronavirus had not had a financial effect on the company.

As at the time of the hearing, the ‘relevant period’ pursuant to the coronavirus regulations was 17 April 2020 to 31 March 2021. However, such period has since been extended by a further update to the regulations to 30 June 2021.

The burden of showing that the financial effect on the company was due to coronavirus, falls upon the company itself.

Having considered the Agreement between the parties, the Court concluded that, on its construction, PGH was not liable to Mr Ewing. On that basis, the winding up petition should be dismissed, as no debt was due.

Whilst it was not then necessary for the Court to go further and consider the ‘coronavirus test’ set out in Schedule 10 of CIGA 2020, the Judge commented that for the purposes of paragraph 5 (1) (c) of Schedule 10, it would be sufficient for a company to demonstrate that coronavirus had an indirect (rather than simply a direct) financial effect upon the company. However, here, PGH had not, in the Judge’s view, produced sufficient evidence to demonstrate coronavirus having an indirect financial effect upon the company.

Therefore, had the Court found that the debt was in fact due and owing, on the Judge’s analysis, the company here would have failed to have demonstrated that coronavirus had a financial effect on the company before the petition was presented and, consequently, the restriction set out in paragraph 5 (3) of Schedule 10 of CIGA 2020 would not apply. Therefore, an order for the winding up of the company could have, in theory, proceeded.

The Judgment serves as a helpful insight into the Court’s view on the interpretation of Schedule 10 of CIGA 2020.

For creditors looking to bring a winding up petition against a debtor company, the bar to overcome is presently very high given the restrictions imposed by CIGA 2020. Whilst this may be frustrating news for creditors looking to pursue debtors in this way, when the restrictions are lifted, many consider the position will revert back to pre-Covid times, which will enable creditors, once again, to take this form of action against debtors.

If you have any concerns or queries relating to this matter or any potential or existing dispute, contact Gemma Newing or a member of our Rooks Rider Solicitors Dispute Resolution team for advice and assistance.

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