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Covid-19 restriction on a winding up petition has a low threshold (prima facie case) says Deputy ICC Judge Passfield.

In the matter of PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch) in which a winding up petition was dismissed, the Court endorsed an earlier suggestion that the threshold for demonstrating a company has been affected by the Coronavirus was a low one:

… it would be sufficient for the purposes of para.5(1)(c) of Schedule 10 to the 2020 Act for the Company to demonstrate a prima facie case that coronavirus had an indirect financial effect of the type identified by Mr Gale … In this regard, I note that the definition of “financial effect” in para.21(3) of Schedule 10 to the 2020 Act is a wide one and it is sufficient for a company to demonstrate that its financial position worsened either “in consequence of” or “for reasons relating to” coronavirus (see para 28 above)… the sole piece of documentary evidence relied on by Mr Gale was the email from Mr Neate to the Petitioner on 22 July 2020 referred to in paragraph 11 above in which he stated: “I’m being told by my source of funds we should complete on Tuesday. I will stay in touch before then with news”. … it does not appear to me that coronavirus had a financial effect on the Company before the presentation of the Petition and therefore the restriction on making a winding up order in para.5(3) of Schedule 10 to the 2020 Act does not apply.

In this case this was not the reason the petition was dismissed. This was because the Court found no liability of the Company to the Petitioner.

Judgment Full Covid-19 Discussion

In light of my finding that the Company is not liable to pay the Admitted Debt, it is not strictly necessary for me to go on to consider the coronavirus test in para.5(3) of Schedule 10 to the 2020 Act. I will however do so on the basis that I heard full argument on this issue and in case this matter goes further.

As indicated in paragraph 29 above, the evidential burden is on the Company to establish a prima facie case that coronavirus had a “financial effect” on the Company before the presentation of the Petition, that is to say the Company’s financial position has worsened in consequence of, or for reasons relating to, coronavirus.

In Re A Company (Application to Restrain Advertisement of a Winding Up Petition) [2020] EWHC 1551, a winding up petition was presented against a company which operated in the field of business and property management services in eastern, western and southern Africa and was a UK holding company for a variety of companies incorporated in the local jurisdictions in which it operated. In a witness statement in opposition to the petition, the director of the company asserted that it was “solvent for its day to day operations, but relies on rolling over corporate debt and fund-raising by the issue of equity for its long-term financing”. He stated that “the current Covid-19 situation has prevented both routes to acquiring new financing as international capital markets have frozen” and that “immediately before the present crisis ensued, the Applicant had agreements in principle for significant new capital financing in the region of over US$10m, all of which fell away when the emergency conditions became full-blown worldwide in early March 2020”. The sole documentary evidence produced in support of those assertions was two draft loan agreements. ICC Judge Barber expressed some reservations as to the quality of the Company’s evidence, but nevertheless concluded that it had met the “low threshold” of establishing that coronavirus had had a “financial effect” on the company as there was adequate evidence before her that a funding drive was underway by late December 2019/early January 2020 which was stopped in its tracks by the onset of the pandemic.

In the present case, in his first witness statement, Mr Neate asserts that coronavirus has had a financial effect on the Company for the following reasons:

  1. i) coronavirus has had a dramatic effect on liquidity investment worldwide and during these uncertain times, it is difficult for the Company to find investors and the Company has lost anticipated investment as a result of coronavirus;
  2. ii) potential purchasers of the Petitioner’s shares are based across the world outside the UK and the travel restrictions imposed as a result of coronavirus have stopped flights for business purposes. Furthermore, within the UK, it has been extremely difficult for him to network and set up business meetings;

iii) the day-to-day operations, business development and revenue of the Company have been severely impacted by coronavirus.

Mr Neate did not adduce any documentary evidence to support those assertions. In his second witness statement, he made the following further unsupported assertions:

  1. i) the Company had not envisaged the long-lasting coronavirus pandemic nor that the country would be in a second lockdown. This has harmed the Company’s financial position significantly because it has been largely unable to trade for the majority of the year;
  2. ii) with the exception of the Petitioner, all investors in PGL and PHL with any monies outstanding to them have agreed to alter previous repayment terms as a consequence of coronavirus;

iii) the Petitioner and the Company discussed whether it would be possible to extend the longstop date for completion in the Agreement to allow further time for him personally to source funds with which to purchase the Petitioner’s shares.

Mr Brown forcefully argued that these bare assertions do not overcome the admittedly low threshold of establishing that coronavirus had had a “financial effect” on the company. He noted that the Company has adduced no evidence to support the bare assertion that that it has lost anticipated investment as a result of the coronavirus pandemic. This can be contrasted with the position in Re A Company, where there was some documentary evidence that the company had been engaged in a funding drive prior to the pandemic. He further noted that the Company is not a trading company. In the circumstances, Mr Neate’s assertion that coronavirus has impacted the Company’s day-to-day operations, business development and revenue must plainly be incorrect. Finally, he relied on the fact that the Agreement was executed after the commencement of the coronavirus pandemic, arguing that the Company would not have agreed to guarantee Mr Neate’s obligations under the Agreement if it has been adversely impacted by coronavirus.

In response, Mr Gale accepted that coronavirus did not have a direct financial effect on the Company because it is simply a holding company which was never intended to attract independent investment. Rather, he argued that coronavirus had had an indirect financial effect on the Company because it has prevented Mr Neate from finding a buyer for the Petitioner’s shares, meaning that he was unable to discharge his primary obligation under the Agreement to pay the purchase price for the Sale Shares and the Loan, leaving the Company liable to pay the Alleged Debt to the Company in his stead. Thus, the Company is in a worse financial position than it would have been in had the coronavirus pandemic not happened.

I accept that it would be sufficient for the purposes of para.5(1)(c) of Schedule 10 to the 2020 Act for the Company to demonstrate a prima facie case that coronavirus had an indirect financial effect of the type identified by Mr Gale (i.e. Mr Neate was unable to pay the purchase price for the Sale Shares and the Loan because of the coronavirus pandemic and this caused the Company to incur a liability which it would not otherwise have had). In this regard, I note that the definition of “financial effect” in para.21(3) of Schedule 10 to the 2020 Act is a wide one and it is sufficient for a company to demonstrate that its financial position worsened either “in consequence of” or “for reasons relating to” coronavirus (see para 28 above).

However, in my judgment, the Company has not produced adequate evidence to demonstrate that Mr Neate was unable to find a buyer for the Petitioner’s shares because of the coronavirus pandemic. In this regard, the sole piece of documentary evidence relied on by Mr Gale was the email from Mr Neate to the Petitioner on 22 July 2020 referred to in paragraph 11 above in which he stated: “I’m being told by my source of funds we should complete on Tuesday. I will stay in touch before then with news”. There is nothing in that email which indicates that any difficulties which Mr Neate had in securing funding for the purchase of the Petitioner’s shares were caused by coronavirus.

In the circumstances, it does not appear to me that coronavirus had a financial effect on the Company before the presentation of the Petition and therefore the restriction on making a winding up order in para.5(3) of Schedule 10 to the 2020 Act does not apply.

If I am wrong in that conclusion, the evidential burden will be on the Petitioner to demonstrate 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. However, at this stage, I would be concerned with the anterior question of whether it is likely that the court will be able to make a winding up order against the Company, which must be determined with regard to the restriction in para.5(3) of Schedule 10 to the 2020 Act.

In Three Rivers DC v Bank of England (No 4) [2002] EWCA Civ 1182; [2003] 1 WLR 210, Chadwick LJ considered the meaning of “likely” in the context of CPR 31.17(3)(a) and rejected the submission that it means “more probable than not”, but also indicated that it connotes a rather higher threshold of probability than merely “more than fanciful”. He held that the word has, in that context, the meaning “may well”. In my judgment, Parliament must have intended that the word “likely” would have the same meaning in the context of para.19(2) of Schedule 10 to the 2020 Act. Accordingly, if I had been satisfied that coronavirus had a financial effect on the Company before the presentation of the Petition, the Petitioner would need to satisfy me that if I allow the Petition to proceed to a final hearing, it may well be able to demonstrate that the Company would be unable to pay its debts as they fall due even if coronavirus had not had a financial effect on it.

In this regard, Mr Brown relied on the fact that the Company’s liability to pay the Alleged Debt arose as a result of an obligation entered into after the commencement of the coronavirus pandemic. He argued that when Parliament enacted the 2020 Act, it cannot have intended that a company adversely affected by coronavirus should be free to incur new debts which it cannot pay without being liable to a winding up order.

In response, Mr Gale argued that that is precisely what Parliament must have intended, otherwise a company which has been rendered cashflow insolvent by the coronavirus pandemic would be unable to continue to trade without risk of being wound up.

I remind myself that the question which the court must determine under para.5(3) of Schedule 10 to the 2020 Act is: would the Company be unable to pay its debts as they fall due if coronavirus had not had a financial effect on it before the presentation of the Petition? In order for the court to be able to answer that question in the affirmative, the Petitioner would need to demonstrate that if coronavirus had not had a financial effect on the Company before the presentation of the Petition, it would still have incurred the Alleged Debt and would still have been unable to pay it. In my judgment, the mere fact that the Alleged Debt arose after the commencement of the coronavirus pandemic does not so demonstrate. Accordingly, if I had been persuaded that coronavirus had a financial effect on the Company before the presentation of the Petition (which, for the reasons set out above, I am not), I would not have been satisfied that there was any likelihood of the Petitioner discharging the evidential burden of satisfying the court that the Company would have been unable to pay its debts as they fall due in any event.

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Elliot Green

Licensed Insolvency Practitioner & Chartered Accountant. We Know Insolvency Inside Out.