Why has it been difficult to get a winding-up order?
The Corporate Insolvency and Governance Act 2020 (CIGA 2020) came into force on 26 June. Under CIGA 2020, creditors are (currently until 30 September 2020, although the period may be extended) unable to present a winding-up petition on the basis of:
- An unsatisfied statutory demand (under section 123(1)(a) of the Insolvency Act 1986 (the Act), where the statutory demand was served on or after 1 March 2020.
- Any unsatisfied judgment or order of any court in favour of a creditor of the company (and any equivalent in Scotland or Northern Ireland) under section 123(1)(a) to (d) of the Act, unless the creditor has reasonable grounds for believing either: a) coronavirus has not had a financial effect on the company; or b) the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.
- It being proved to the court’s satisfaction that (i) the company is unable to pay its debts as they fall due (section 123(1)(e)) or (ii) the value of the debtor’s assets is less than the value of its liabilities (section 123(2)) of the Act, unless either: a) coronavirus has not had a financial effect on the company; or b) the relevant ground would apply even if coronavirus had not had a financial effect on the company.
As it was made clear that these restrictions would operate retrospectively from 27 April 2020, the small spattering of petitions which reached the court prior to 26 June were unsuccessful, with the judiciary deliberating in anticipation of the restrictions coming in when CIGA 2020 was enacted.
However, on 8 July 2020 - in the case of Re: Tundrill Ltd CR-2020-002351 - ICC Judge Mullen made the one of the first orders to wind-up a company pursuant to a petition lodged during the restricted period.
Why was this petition successful?
The petition was issued on 1 May 2020 by a creditor to whom the relevant debt had been assigned in March 2020. However, the debt itself had been outstanding since April 2019. Submissions were therefore made on behalf of the creditor that: 1) the debt significantly pre-dated any impact caused by COVID-19; and 2) on the basis of the latest filed accounts, the Company appeared to have been balance sheet insolvent as far back as 2018.
The company contested the petition but ultimately failed to substantiate its claims that there was:
- A dispute as to the entitlement of the debt
- Any financial impact caused by coronavirus
- Any real prospect of the company turning around or being able to pay the debt
Judge Mullen therefore granted the winding-up order, concluding that the debt was long overdue and that if coronavirus had not intervened, there was nothing that he had seen to suggest that the position would be any different.
Tim Carter, Co-Head of restructuring and insolvency at Stevens & Bolton LLP, comments that:
"This will go a little way to address the concern of creditors (including a number of my clients) that the courts are prepared to grant winding-up orders and that it is possible to establish that non-payment of a debt can be unrelated to COVID-19 – for example where there are longstanding financial difficulties. It will give some reassurance that the courts will look beyond the smokescreen which may be thrown up by debtors looking to capitalise on the restrictions - put in place by the government to assist struggling businesses where the cause is pandemic-related – and therefore this route of recourse is not completely closed off to creditors. It won’t necessarily be easy, but this case demonstrates that the prescribed hurdles can be safely negotiated."