PROVING THINGS 214: CORONAVIRUS, COMPANIES AND INSOLVENCY: PETITIONER FAILS TO PROVE ITS CASE

August 16, 2021 · by · in Civil evidence, Civil Procedure, Coronavirus

The judgment of HHJ Kelly (sitting as a judge of the High Court) in A Company, Re [2021] EWHC 2289 (Ch) concerns some intricate provisions of the Corporate Insolvency and Governance Act 2020  Ultimately, however it was a matter of evidence.  The petitioner, which had the burden of proof on a key issue, failed to establish its case.

“… more evidence would be needed than is before the court to enable me to find that it is likely that the Debtor Company would have been insolvent within the meaning of section 123 of the 1986 Act in any event and therefore that a court could make a winding up order if the petition was heard.”

THE CASE

The petitioning creditor was owed £146,899.06 by the respondent company.  The petitioner issued a winding up petition.

THE LAW

The Act provides a measure of protection for companies that have been affected by the coronavirus crisis. In essence if the company is insolvent due to the impact of Covid, but was solvent before that, then it should not be wound up.

THE BURDEN OF PROOF

The judge set out the relevant test.

    1. In the case of Re A Company (Application to Restrain Advertisement of a Winding Up Petition) [2020] EWHC 1551 (Ch), ICC Judge Barber identified a two-stage approach:
(1) initially, the Debtor Company has the evidential burden of showing that the coronavirus has had a financial effect on the company before the presentation of the relevant petition. She stated in terms of paragraph 44 of her judgment that this was intended to be a “low threshold” and that “the requirement is simply that ‘a’ financial effect must be shown; it is not a requirement that the pandemic must be shown to be the (or even a) cause of the company’s insolvency”. What has to be demonstrated is a “prima facie case, rather than prove the ‘financial effect’ relied upon on a balance of probabilities”.
(2) If the Debtor Company establishes that coronavirus has had a financial effect, the burden then shifts to the Petitioning Creditor who has to demonstrate that if the financial effect of the coronavirus is ignored, the Debtor Company would still be insolvent within the meaning of s123(1)(e) or (2).

THE BURDEN OF PROOF IN THE CURRENT CASE

(1) Showing that coronavirus has had a financial effect on the compay

The judge held that this was established.   There were some omissions in the company’s evidence but these were for understandable commercial reasons.

(2) Showing that if coronavirus is ignored the debtor company will still be insolvent

Here the evidence of the petition was found wanting.
    1. Having decided that the coronavirus has had a financial effect on the Debtor Company, the burden of proof now moves to the Petitioning Creditor to establish that even if the coronavirus had not had such financial effect, the Debtor Company would still have been unable to pay the judgment sum.
    1. The starting point for the grounds relied upon by the Petitioning Creditor are contained in the petition itself. The grounds relating to the coronavirus test for seeking the winding up of the company are set out in paragraphs 9.1 to 9.3:
9.1 The debt is for a sum found property (sic) due under the Contract which was entered into in May 2020 and for payment due December 2020.
9.2 At no time until the Judgment Sum fell due for payment, namely by email dated 11 May 2021 has the company ever suggested that it is unable to pay the sum awarded or any sum awarded.
9.3 In the email dated 11 May 2021 no reference is made to the impact of coronavirus on the company. The company does offer to pay but over three months, which is not acceptable. The company has paid previous applications for payment prior to the debt the subject of this petition.
    1. The fact that the judgment debt is in respect of a contract entered into after the start of the coronavirus pandemic, with payment due in December 2020, does not assist me in finding that the Debtor Company would have been unable to pay its debts in any event. Indeed, Mr Smith’s own evidence is to the effect that previous payments due under the contract were in fact made. It is only the final payment, which was disputed and referred to adjudication, which remains unpaid. That fact would appear to undermine any assertion that the fact of entering into the contract during the coronavirus period has a bearing on whether or not the Debtor Company could pay its debts at that time.
    1. As I stated earlier in relation to the first limb of the test, it is not a great surprise that the Debtor Company did not suggest until the May 2021 email that it was unable to pay. I accept the submission of Mr Taylor that as a matter of common sense and commercial reality, it is unlikely that any company would wish to advertise the fact that it was experiencing cash flow difficulties.
    1. Although the email of May 2021 did not make reference to the impact of coronavirus on the company, I note the evidence of Mr Priestley in responding to this assertion in the petition at paragraph 13.3 of his first statement where at the end of that paragraph
he states: “To be perfectly honest, I thought it would go without saying that the pandemic has had a negative impact on the Company’s financial position”.
    1. What evidence is there to show that even without the impact of the coronavirus, the Debtor Company would be unable to pay its debts as they fell due? A bare assertion is made at paragraph 10 of the petition that the Debtor Company was and has remained unable to pay its debts when they fell due since no later than 14 November 2018. In my judgment, the evidence of Mr Smith goes nowhere near establishing that this is the position.
    1. Indeed, apart from commenting on the likely accuracy of the profit and loss account comparison between the year 2020 and 2019, which would appear to show some inaccuracy as the Petitioning Creditor had been paid more than the Debtor company stated had been paid in respect of the project, he cannot give evidence directly on the finances of the Debtor Company at all. As Mr Taylor observed, if Mr Smith is right about the additional payments being made to the Petitioning Creditor over and above that which is demonstrated in the account, that would only go to worsen the position of the Debtor Company in terms of its finances.
    1. Mr Tucker sought to persuade me that because the Debtor Company has over £2 million worth of unpaid debts (which in 2019 when the company made a modest profit would have equalled approximately one third of total turnover), if that £2 million worth of debts remained unpaid in the good times, the Debtor Company would still have been unable to pay its Creditors. I do not accept that submission. The financial position of the Debtor Company in 2020 was completely different to its financial position in 2019 when it made a profit. It is too simplistic in my judgment simply to say that if the same level of debt were compared to earlier years, the Debtor Company would in any event have been unable to pay its debts.
    1. I accept the submission made by Mr Taylor that the financial effect of the coronavirus pandemic on the Debtor Company is “inextricably linked” to its inability to pay the judgment debt. I also accept his submissions that more evidence would be needed than is before the court to enable me to find that it is likely that the Debtor Company would have been insolvent within the meaning of section 123 of the 1986 Act in any event and therefore that a court could make a winding up order if the petition was heard.
  1. Having made that finding, it follows that the petition must be dismissed.
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