High Court re-confirms coronavirus test for winding up petitions

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On 11 August 2021, the High Court (Business and Property Courts in Leeds) gave judgment in a case reconfirming the test that must be satisfied to allow a winding up petition to go ahead under the restrictions imposed by the Corporate Insolvency and Governance Act 2020 (“CIGA”).

Under CIGA, a creditor may not petition for a winding up order unless “it has reasonable grounds for believing that coronavirus has not had a financial effect on the company or [the company’s inability to pay its debts] would apply even if coronavirus had not had a financial effect on the company”. Coronavirus has a financial effect “if (and only if) the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus”.

In deciding whether coronavirus has a financial effect, there is a two-stage test:

  1. Initially, the debtor company has the evidential burden of showing that the pandemic has had a financial effect on the company. This is a low threshold test, and the requirement is simply to show some financial effect;
  2. If the debtor company establishes that the pandemic has had a financial effect, the burden shifts to the petitioning creditor who has to demonstrate that if the financial effect of the pandemic is ignored, the debtor company would still be insolvent.

The petitioning creditor presented a winding up petition on 17 May 2021. The debt related to monies owed under a construction contract; the debtor was the main contractor in respect of a development and the petitioning creditor was engaged as a sub-contractor.

As to the first stage, the Court was content that the debtor company satisfied the first test, in that the pandemic has had a financial effect on its business. There had been adverse impact on the company’s cashflow caused by an increased amount of debtors as well as difficulties with workers self-isolating leading to delays in completion of projects. The debtor company made some payments under the contract but was unable to make the final payment which it said was as a result of cashflow problems arising from the pandemic.

As to the second stage, the Court was not satisfied that the petitioning creditor had discharged the burden of proof to show that if the financial effect of the pandemic was ignored, the debtor company would still be insolvent. It had only made bare assertions about the debtor’s financial position and had given no direct evidence on the finances of the debtor company at all. On that basis, the winding up petition was dismissed.

The case is a welcome reminder of the test to be applied in these cases. The fundamental difficulty for a petitioning creditor is always going to be whether it can provide the evidence to satisfy the second test. Unless it can clearly be shown that the financial difficulties pre-dated the pandemic, this may well be a very difficult task.