PROVING THINGS 207: CORPORATE INSOLVENCY AND CORONAVIRUS: A COMPANY STILL HAS TO PROVE SOLVENCY PROBLEMS WERE DUE TO COVID

In PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch) Deputy ICC Judge Passfield considered questions of evidence in relation to the provisions that prevent winding up of a company when it can establish that its financial state is due to coronavirus. The case is a reminder that a corporate respondent who wishes to rely on coronavirus to resist a petition has to produce sufficient evidence to establish this.

 

THE CASE

The petitioner sought to wind up the company alleging an unpaid debt.  The petitioner failed to establish the debt was due.  However the respondent company had defended the application on a number of grounds.  One of those was that its current financial position was due to coronavirus.  The judge dismissed the petition on the grounds that the debt was not due. However the judgment went on to consider the company’s reliance on the 2020 legislation which provides a “respite” where insolvency is caused by coronavirus.

THE RELEVANT PROVISIONS OF THE CORPORATE INSOLVENCY AND GOVERNANCE ACT 2020

The judge reviewed the relevant statutory provisions.  These placed the burden on a respondent company to establish that its financial position was caused by coronavirus.

    1. By para.5(1) and (3) of Schedule 10 to the 2020 Act, where (a) a creditor presents a petition for the winding up of a registered company under s.124 of the 1986 Act during the “relevant period”, (b) the company is deemed unable to pay its debts on the ground specified in s.123(1)(e) of the 1986 Act (i.e. the company is unable to pay its debts as they fall due) and (c) it appears to the court that coronavirus has had a financial effect on the company before the presentation of the petition, the court may only make a winding up order against the company if it is satisfied that the ground in s.123(1)(e) of the 1986 Act would apply (i.e. 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. By para.21(1) of Schedule 10 to the 2020 Act (as modified by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020/1483), the “relevant period” means the period which begins with 17 April 2020 and ends with 31 March 2021. By para.21(3) of Schedule 10 to the 2020 Act, coronavirus has a “financial effect” on a company if (and only if) the company’s financial position worsens in consequence of, or for reasons relating to, coronavirus.
  1. The evidential burden of showing that coronavirus had a “financial effect” on the company before the presentation of the petition is on the company. In this regard, the company need only establish a prima facie case. If that is established, the evidential burden shifts to the petitioner to show that even if the financial effect of coronavirus is ignored, the company would still be unable to pay its debts as they fall due (Re A Company (Application to Restrain Advertisement of a Winding Up Petition) [2020] EWHC 1551 (Ch); [2020] BCC 773 at [40] and [44]-[45]).

THE EVIDENCE IN THE CURRENT CASE

The judge then considered the evidence provided by the company in the current case. It was held that the evidence provided was not sufficient to satisfy the burden placed on the company.

    1. 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.
    1. 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.
    1. 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.
    1. 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:
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;
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.
    1. Mr Neate did not adduce any documentary evidence to support those assertions. In his second witness statement, he made the following further unsupported assertions:
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;
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.
    1. 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.
    1. 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.
    1. 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).
    1. 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.
  1. 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.