The Corporate Insolvency and Governance Bill 2020 (the “CIG Bill”) has been placed before parliament and will be subject to debate in the coming days and weeks.
Notwithstanding that it has not yet passed into law, the CIG Bill has created uncertainty in relation to whether a creditor can present a winding up petition against a debtor company, and how the court would treat an application by a company to restrain the presentation of a winding up petition.
There is now much greater certainty following the judgment handed down on 2 June 2020 in the case of Re: A Company (Injunction to restrain presentation of petition) [2020] EWHC 1406 (Ch), in which Mr Justice Morgan granted an interim injunction restraining the presentation of a winding up petition against a High Street retailer by its Landlord.
To protect the interests of the company, the judgment has been anonymised.
The relevant provisions of the CIG Bill are contained in schedule 10.
Paragraph 1 of schedule 10 precludes the presentation of a petition for the winding up of a company on or after 27 April 2020 on the grounds of non-compliance with a statutory demand, where the demand is served on a date between 1 March 2020 and 30 June 2020.
Paragraph 2 restricts the presentation of winding up petitions based on various grounds including non-compliance with a statutory demand, where it is proved that the company is cash flow insolvent, or where it is provided that the company is balance sheet insolvent.
A creditor who seeks to present a petition on any of these grounds is required to satisfy a condition, namely that the creditor has reasonable grounds for believing that (a) coronavirus has not had a financial effect on the company, or (b) the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.
Pursuant to paragraph 5 of schedule 10, where a creditor presents a petition for the winding up of a company in the relevant period, and the company is deemed unable to pay its debts on one of the ground mentioned above, and it appears to the court that coronavirus had a financial effect on the company before the presentation of the petition, then the court may wind the company up only if it is satisfied that the facts by reference to which the ground applies would have arisen even if coronavirus had not had a financial effect on the company.
In Re: A Company the court heard evidence about the progress of the CIG Bill through Parliament, and the expectation that the CIG Bill will receive Royal Assent by the end of June 2020. The Judge declared a high degree of confidence that schedule 10 will be enacted in more or less its current form. If these provisions of the CIG Bill are enacted in their present form, then their effect will be clear.
The court considered that if the petition that was the subject of the application were presented, it is most unlikely that it would be heard before the CIG Bill is enacted, and once enacted, the relevant provisions are to be regarded as having come into force on 27 April 2020.
That being the case, the court considered that it would be necessary to consider whether coronavirus has had a financial effect on the company before the presentation of the petition. If that is held to be the case, then the court can only wind up the company if it is satisfied that the facts on which the petition is based would have arisen even if coronavirus had not had a financial effect on the company.
The company presented a substantial body of evidence as to the effect of coronavirus on the finances of the company and whether the facts on which the petition would be based would have arisen even if coronavirus had not had a financial effect on the company. The court concluded that on that evidence there is a strong case (at the lowest) that coronavirus has had a financial effect on the company before the presentation of the petition and, further, that the facts on which the petition would be based would not have arisen if coronavirus had not had a financial effect on the company.
The natural consequence of this is that a petition to wind up the company would not result in the court making a winding up order.
The court was persuaded that the presentation of a petition in this case (which would ultimately fail) would nonetheless have a seriously damaging effect on the company.
Although the CIG Bill has not yet been enacted, the Judge determined that the court was entitled to take into account its assessment of the likelihood of a change in the law which would be relevant to that its decision, and that in this case the likelihood of a change in the law was represented by schedule 10 to the CIG Bill.
In all the circumstances the court considered it was right to grant an interim injunction to the company to prevent the winding up petition being presented by its Landlord, and that the grant of an injunction to restrain the presentation of the petition is powerfully supported by the clear policy objectives of the CIG Bill.