Corporate Insolvency Case Update – Winding up petitions and a reminder of the role of the statutory demand

This case involved a winding up petition that was presented against our client in November 2020 under the original provisions of Schedule 10 of the Corporate Insolvency and Governance Act 2020 (CIGA) that were in place at the time.

Essentially, the petitioning creditor petitioned in respect of non-payment of a loan that it advanced to our client under a loan agreement. Under that loan agreement there was a contractual repayment date specified (March 2020) but if non-payment hadn’t occurred by that date the petitioner was able, amongst other things, to charge an enhanced rate of interest to the balance of the payments outstanding. Repayment hadn’t occurred by the time of the contractual repayment date and no material steps were taken by the petitioner until some three months after (in June 2020) when it served a statutory demand on our client for the outstanding sums.

In July 2021 a preliminary hearing took place in accordance with the Practice Direction relating to CIGA to determine whether, firstly, our client could satisfy that Covid 19 had had a ‘financial effect’ on its business before the petition was presented. If it did, the burden then shifted to the petitioner to show that our client would still have been unable to pay its debts as and when they fell due even if Covid 19 hadn’t had a financial effect on the business. Our client was able to satisfy this initial test and the petitioning creditor failed to discharge the burden it was subject to under paragraph 5(3) of Schedule 10 to CIGA.

The petition was subsequently dismissed forthwith in July and judgement was later handed down in November 2021, at which point the petitioning creditor was ordered to pay our client’s costs.

The petitioner sought permission to appeal the decisions made in July and November 2021, both of which were made by ICCJ Barber, on the basis that the judge had applied the wrong date as to when the provisions of paragraph 5(3) of Schedule 10 to CIGA should be applied. The petitioning creditor argued that the relevant date for establishing when the company fell unable to pay its debts as and when they fell due (being the ground on which it relied to petition for our client to be wound up) for the purposes of Schedule 10 to CIGA was the contractual repayment date (i.e. March 2020). We argued for our client this was not the case and instead the relevant date was the date of the statutory demand being issued (or a few days’ thereafter).

The permission to appeal hearing was recently heard before the Mr Justice Miles who found that ICCJ Barber had not erred in her decisions and refused the petitioning creditor permission to appeal, meaning the orders made in July and November 2021 remained in place and a further costs order was made against the petitioning creditor in our client’s favour.

Whilst this case primarily focused on the initial provisions of Schedule 10 of CIGA, which were subsequently replaced with effect from 1 October 2021 and which in turn were no longer in effect beyond 31 March 2022, this case does provide a useful reminder about the importance of issuing a statutory demand against a company to establish its inability to pay its debts as and when they fell due. This case did not go against previous authorities to state a statutory demand was critical to establish a company’s inability to pay its debts and a court will consider all of the facts of a case (including the relationship between debtor and creditor; the contractual terms of the parties’ dealings; and whether any security was granted/offered) on the issue.

However the takeaway here is that a creditor should not just simply rely on a contractual repayment date lapsing as sufficient evidence of proving a company’s inability to pay its debts as and when due - a timely issued statutory demand could remove any debate or difficulties on the issue.

 

Reported case citations: Re A Company [2022] EWHC 1690 (Ch) and Re A Company [2021] EWHC 2905 (Ch)