The Coronavirus Test: Indirect ‘financial effect’ of coronavirus could be sufficient to defeat a winding up petition (UK)
Following the UK Government extending the restrictions on winding up petitions until 30 June 2021 it is useful to note two recent cases that have considered the coronavirus test that currently applies to winding up petitions.
In the first case Newman v Templar Corp Ltd  EWHC 3740 (Ch) heard before Christmas but only recently reported, the judge took the view that the low threshold test for determining whether coronavirus had had an impact on the financial position of the company was to be taken as settled law. For more details about that the coronavirus test and the case see our previous blog here.
In the second case of Re PGH Investments Ltd v Ewing  EWHC 533 (Ch) (“PGH Investments”) the judge offered some helpful insight into the meaning of ‘financial effect’.
In PGH Investments, although it was determined that the debtor company was not liable to pay the alleged debt, the judge went on to consider the ‘coronavirus test’ having heard full argument on the point and in case the matter went any further.
Of note is the view taken by the judge that the definition of ‘financial effect’ in paragraph 21(3) of the Corporate Insolvency and Governance Act 2020 is wide, and it is sufficient for a company to demonstrate that its financial position worsened either “in consequence of” or “for reasons relating to” coronavirus”, acknowledging that it would be sufficient for the purposes of para.5(1)(c) of Schedule 10 to the 2020 Act to demonstrate a prima facie case that coronavirus had an indirect financial effect.
In this case, it was argued that coronavirus had an indirect financial effect on the debtor company because the travel and social restrictions in place as a result of coronavirus prevented them from fulling their obligations under an agreement, which in turn resulted in them becoming liable to pay the alleged debt.
However, the judge found that the debtor company would not have overcome the ‘coronavirus test’ (had it needed to) because it had not provided any evidence (at all) to demonstrate that coronavirus had had a financial effect on the business, whether that was directly or indirectly. The Court confirmed that, although the threshold of the ‘coronavirus test’ is low, simply asserting that the business has been affected by coronavirus, is not enough.
This decision acts as a further reminder to debtors that they must not be complacent as to what evidence they produce to show that the ‘coronavirus test’ has been met. Even though most businesses have suffered as a consequence of coronavirus it is clear that simply making broad assertions as to the financial effect that coronavirus has had on the business, is unlikely to succeed.
For companies that have suffered financially and face a winding up petition, it is helpful to know that the court will take into account indirect financial effect when assessing whether the coronavirus test is met.
This post was written by Amelia Sharkey.