On 7 June 2022, the High Court of Justice handed down a new judgment regarding the application of Schedule 10 of the Corporate Insolvency and Governance Act 2020 (CIGA), along with the accompanying Insolvency Practice Direction.
According to this emergency legislation, a creditor may not present, during the relevant period, a petition for the winding up of a debtor company unless it has reasonable grounds for believing that the coronavirus has not had a financial effect on the latter or that the grounds on which the winding up rely would have arisen even if COVID-19 had not had such financial effect on the debtor.
In the case at hand, a Note Trustee filed winding up petitions against three major companies, including the UK largest operating entity in the steel industry. The petitioner alleged that the debts owed by the companies arose respectively under Receivable Purchase Agreements and an Amended and Restated Receivables Purchase Deed originally entered into in 2018 and 2019.
Called upon deciding whether to accept the creditor’s request, the Court first clarified that the purpose of the legislation is to protect otherwise economically viable businesses experiencing significant trading difficulties by temporarily preventing winding-up proceedings if the court is satisfied that the coronavirus “had a financial effect on the company which has caused the grounds for the proceedings”. The Court first recalled that the objective of the legislation is to provide a temporary safe harbour for companies undergoing a financial storm caused solely by the pandemic. The Court then considered that, based on the 2-stage ‘coronavirus’ test, the debtor company has the evidential burden – a low threshold one – of showing that the pandemic has had a financial effect on the company. Should the debtor company establish that circumstance, the burden shifts to the creditor who must demonstrate that, regardless of the effects of the pandemic, the debtor company would still be insolvent.
With regard to the substance, while appreciating that COVID-19 undoubtedly caused some financial harms to the companies involved, including the need to shut down their factories during the lockdown period, the Court found that there is no causal link between the loss of revenue suffered by the debtors between April and August 2020 and the inability to pay the debts specified in the petition presented nearly a year later. In formulating its findings, the Court applied the ‘balance of probability’ test and concluded that, based on the submitted evidence, it is more likely than not that the companies collapsed because they were no longer able to obtain credit insurance as a result of corporate issues, such as the concentration within a single group, rather than because of the pandemic.