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Volume XI, Number 337

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UK court provides further clarity on the ‘coronavirus test’ for winding up petitions

The case of Newman v Templar Corp Ltd [2020] EWHC 3740 (Ch) came before the courts in December 2020 and provides a helpful example as to when a winding up petition can overcome the ‘coronavirus test’ set out in Schedule 10 of the Corporate Insolvency and Governance Act 2020 (“CIGA”).  The judge also concluded that the low threshold test in Re A Company (2020) EHC 1551 should be taken as the settled approach to these type of cases.

CIGA came into force on 26 June 2020 temporarily prohibiting the issuing of winding up petitions unless the ‘coronavirus test’ was met and prohibiting winding up petitions being presented after 27 April 2020 based on statutory demands.  This prohibition is currently in place until 31 March 2021 (unless extended) – see here for our previous blog setting out the detail.

The coronavirus test requires the courts to firstly look at whether coronavirus has had a financial effect on the company or whether the grounds for the petition would have apply even if coronavirus had not had a financial effect on the company before allowing a winding up petition to proceed.

The case of Re A Company [2020] EHC 1551 placed the evidential burden of showing that coronavirus has had a financial effect on the debtor before the presentation of the petition on the debtor itself. Judge Barber concluded that this was a low threshold and a debtor only need to establish a prima facie case that they had been financially impacted by the coronavirus before the presentation of the petition.

Turning to the facts of Newman v Templar Corp Ltd, a winding up petition was filed against Templar Corp Ltd (the “Company”) for unpaid wages. The Company argued that they were waiting for an investment before they could pay employees’ wages but because of the travel restrictions imposed because of the pandemic, the investor could not sign the investment agreement. The Company issued several broken promises to its employees that the investment would soon arrive and their wages would be paid. The Judge found these broken promises to be of significance as it suggested there was no confidence that any investment would actually occur.

Judge Agnello concluded that the evidence provided by the Company offered nothing to indicate that the reason for non-payment and failure to invest was because of the coronavirus. No investment agreement, email exchange or explanation from the investor was provided and it was even questioned why the investment agreement needed to be completed face to face in the first instance. The Judge therefore concluded that the evidence did not establish a prima facie case and distinguished it from Re A Company as Judge Barber in that case, had more detailed evidence to deduce that the low threshold test was met.

It was held that the low threshold of showing that coronavirus had a financial effect on the Company was not satisfied, and went on to list the winding-up petition for a hearing.

Newman v Templar Corp Ltd is a reminder to debtors, that although the low threshold test is advantageous to a debtor and a petition is relatively easy to defend by producing evidence that shows coronavirus has impacted them, they must not be complacent as to what evidence they produce.

Amelia Sharkey wrote this article.

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 70
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