The Corporate Insolvency and Governance Act 2020: Restrictions on winding up petitions - Covid19

Sydney Mitchell LLP

On 25 June 2020 the Corporate Insolvency and Governance Act 2020 (CIGA) came into force.  This act enacts short term changes to the Insolvency Act in response to the COVID 19 issues and also long term reforms to the Insolvency processes.  Many of the amendments are incorporated as amendments into the Insolvency Act 1986 as well as a new Insolvency Practice Direction.  This article deals with the new reforms relating to winding up petitions.

Restrictions on presenting winding up petitions - Covid19

As a result of COVID 19 there is now a ban on the presentation of winding up petitions on or after 27 April 2020 if they are based upon statutory demands served between 1 March 2020 and 30 September 2020 and No winding up petitions can be presented between 27 April 2020 and 30 September 2020 unless the petitioning creditor has reasonable grounds for believing that COVID 19 had no financial impact on the company or that the company would have become unable to pay its debts even if COVID 19 had not had a financial impact on the company. The court is only permitted to order the winding up of a company if it is satisfied that the relevant ground relied upon by the petitioning creditor would have applied notwithstanding the financial impact on the company of COVID 19.

Cases heard so far

The effects of these restrictions have so far been seen in the following cases:

Re A Company [2020] EWHC 1551(Ch), provides some useful insight as to how the courts will interpret the new provisions. In this case the court restrained advertisement of a petition in relation to an old debt as the petitioner had not provided sufficient evidence to satisfy the court that the company would have been unable to pay its debts regardless of the financial effects of COVID 19.

The Judge found that:

  1. the evidential burden of showing COVID 19 had a financial impact on a company is on the company and not the petitioning creditor;
  2. whether COVID 19 has had a financial effect is a low threshold with no requirement to show that COVID 19 is the (or even a) cause of the company’s insolvency; and
  3. the burden of showing that the company would be insolvent, even if COVID 19 had not had a financial effect, is on the petitioning creditor

In Re A Company [2020] EWHC 1406 (Ch) the court granted an interim injunction to restrain the presentation of a landlord’s winding-up petition. The Judge found that there was a strong case that COVID 19 had had a financial effect on the company and that the facts on which the winding-up petition would be based would not have arisen if COVID 19 had not had a financial effect on the company.

How winding up petitions are now being dealt with

In the event that a winding up petition is now presented with the relevant endorsements by the petitioning creditor as to the impact of COVID 19 on the company the Court will now list the matter for a 15 minute “non-attendance PTR”.  If the petition is not opposed and the court is satisfied that it is likely to make a winding up order despite the COVID 19 issues the court can order the petition to be listed in the winding up list.  The usual rules as to advertisement of the petition thereafter apply.  Otherwise the court can provide other directions including listing the matter for a preliminary hearing.

All of this makes presenting a winding up petition at the moment far more costly than would have previously been the case (at least until the end of September).  Further if the court dismiss the winding up petition considering that it should not have been presented due to the COVID 19 issues the petitioning creditor could face an order to pay the company’s costs and potential damages if the company has suffered losses as a result of the presentation of the petition.  This for many might be a risk simply not worth taking in the short term.

Can a statutory demand still be presented?

There is not a ban on the service of statutory demands however service of a statutory demand without having the threat of a winding up petition is of no real benefit.

A Temporary fix

All of this is a temporary fix to try and assist all of those businesses suffering as a result of COVID 19.  However once these measures expire (at the moment at the end of September) and businesses are in even more debt then there is seemingly no further help for them. For this reason business should start considering their options and taking advice now and not leave matters until September when it may be too late and a winding up of the company is then likely to be inevitable.

For further help and guidance on the winding up process please contact Leanne Schneider-Rose on 0121 698 2211 or Gemma Parker on 0808 166 8827