UK: Winding Up Petitions – The Hurdle of the Coronavirus Test
The recent case of Re A Company  EWHC 2289 (Ch) outlines how the coronavirus test for winding up petitions will be applied by the Courts. Taking a similar approach, to the cases of Newman v Templar Corp Ltd  EWHC 3740 (Ch) and Re PGH Investments Ltd v Ewing  EWHC 533 (Ch), both as detailed in our blogs here and here, the low threshold test for determining whether coronavirus had an impact on the financial position of the Company was applied.
The coronavirus test prohibits a creditor from pursuing winding up proceedings against a debtor company that has been financially affected as a consequence of the coronavirus pandemic. The temporary changes to winding up petitions are set to end on 30 September 2021 (and therefore the helpfulness of this case is perhaps limited). However if, as hinted at by the UK government, these measures are extended to prohibit recovery of COVID rent arrears, it is worth noting how the debtor and court approached the question of whether coronavirus has had a ‘financial effect’ on the company.
It is not a requirement that the pandemic must be shown to be the (or even a) cause of the company’s insolvency.
In this case the debtor company’s evidence addressed the fact that the company had experienced difficulties with workers self-isolating, which had delayed completion of projects, and therefore cash flow. The Judge commented that alone would have sufficed to show that coronavirus had had a financial effect on the debtor company.
From a debtor company’s perspective, demonstrating that coronavirus has had a financial effect on the company is unlikely to be difficult to evidence, particularly where the business has been affected by the availability of workers. That said, the petitioner did criticise the debtor’s evidence in this case, and similar criticisms have been raised in previously reported cases.
Although the judge commented that more particularised evidence could have been given by the debtor company about the company’s reduced turnover, she did take into account that the debtor company’s experience was supported in evidence by independent articles that mirrored ‘what was being reported in articles concerning the construction industry generally.’
If a debtor company is able to demonstrate that coronavirus had had a financial effect on the company, the onus then falls on the petitioning creditor to evidence that a debtor company would have been unable to pay the debt in any event.
In this case, the petitioning creditor was not able to overcome the second limb of the test because more evidence was required to demonstrate that the company was insolvent within the meaning of s123 Insolvency Act 1986.
Although the bar is low to establish that coronavirus has had a financial effect, bare assertions will not suffice to show that a debtor company would still not have been able to pay. This is a difficult evidential point for a petitioner who cannot give direct evidence on the finances of the debtor.
Bethany Bloor contributed to this article.