Insolvency – Winding-up petition – “Coronavirus test” – Petitioning creditors appealing against dismissal of winding-up petition presented against respondent company on ground that court not likely to be able to make order under section 122(1)(f) of the Insolvency Act 1986 having regard to “coronavirus test” – Whether judge erring in application of coronavirus test – Appeal dismissed
The respondent company operated a franchise of Hunters estate agents. The appellant petitioners owned four properties in Wallasey, Merseyside, which they let to tenants. In about 2009, the respondent agreed to collect the rents for the properties and pay them, after deductions, to the appellants. From about 2013, the respondent started paying most of the rent which it collected into a specified bank account.
On 13 March 2020, the first appellant said that that account was wholly unknown to her and complained that the appellants had not received rental payments for the period 2014 to 2019 of over £60,000. The appellants subsequently demanded an immediate payment of £50,000 within seven days.
The respondent denied liability and the appellants presented a winding up petition. The respondent argued that the debt was disputed because the appellants must have instructed it to start making payments to the bank account otherwise it would not have done so.
By paragraph 5(1) and (3) of schedule 10 to the Corporate Insolvency and Governance Act 2020, where a creditor presented a petition for the winding up of a registered company which was deemed unable to pay its debts under section 123(1) or (2) of the Insolvency Act 1986, and it appeared to the court that the coronavirus had a financial effect on the company before presentation of the petition, the court might wind the company up under section 122(1)(f) only if it was satisfied that the ground would apply even if coronavirus had no financial effect (the coronavirus test).
A district judge dismissed the petition on the ground that it was not likely that the court would be able to make an order under section 122(1)(f) having regard to the “coronavirus test”.
Held: The appeal was dismissed.
(1) The 2020 Act required the court to determine whether it was likely that the court would be able to make an order under section 122(1)(f) or (5)(b) of the 1986 Act before any notice, publication or advertisement of the petition without which a petition could not ordinarily proceed. In context, that meant “likely given the restrictions on winding-up petitions for which schedule 10 provides”.
Under paragraph 5, an order might be made if the court was satisfied that the relevant ground would apply even if coronavirus had not had a financial effect on the company. The words “even if” directed the court to the financial effect of coronavirus, not to the applicability of the relevant ground. The court was to assume that the ground applied, rather than determining whether it was likely to apply or not, when considering whether, on the assumption that it did apply, it would have applied even without the effect of coronavirus. Any practical difficulty would be mitigated by the ability of the court as a matter of case management to consider whether the petition ought to be struck out on other grounds in any event, though for that purpose the test was not mere likelihood (or unlikelihood).
It was unlikely that parliament would have intended to raise the threshold for petitions on grounds unrelated to coronavirus. That would have required clear words which were not found in paragraph 5 of schedule 10.
(2) Non-payment of a single undisputed debt might be sufficient to satisfy the court under section 123(1)(e) of the 1986 Act that a company was unable to pay its debts as they fell due. However, normally it had to be shown that the company was notified of the amount of the debt and given an opportunity to pay it: it was a matter of inferring inability to pay from non-payment. The appellants did not appear to dispute that the respondent believed it was making payments to the bank account on instructions and there was no evidence that it was aware that it had any outstanding indebtedness to the appellants until March 2020.
Where, as here, there was a dispute about whether the debts had been discharged and, if they had not, the natural inference that it was only as a result of a mistake, it was impossible to infer from the failure to discharge debts an inability at the time the payments were made, to do so. The fact that it had not paid them was amply explained by the fact that the respondent denied liability.
(3) The district judge did not hold that the respondent could not be said to have been unable to pay its debts as they fell due if it did not subjectively know the debts were due. He rightly regarded it as relevant to the question whether non-payment could found an inference of inability to pay that it was only in March 2020 that the appellants raised the matter with the respondent. If the respondent did not know that it was being said that the debt had not been discharged until then, its failure to discharge it until then did not support such an inference.
It was common ground that coronavirus had a financial effect on the respondent before the presentation of the petition. The burden was therefore on the appellants to demonstrate that the respondent would have been unable to pay its debts as they fell due even if coronavirus had not had a financial effect on the company: Re a Company (Application to Restrain Advertisement) [2020] EWHC 1551 (Ch) followed.
(4) There was ample reason for the court to conclude that it was not likely to be able to make a winding up order because even if the respondent was now unable to pay its debts as they fell due, the court would not be likely to be satisfied that the respondent would have been so unable even if coronavirus had not had a financial effect on it. The appellants relied solely on the fact that the rental income allegedly not paid to them had fallen due for payment before the pandemic started and that was far from sufficient to discharge the burden upon them.
The coronavirus test had nothing to do with the effect of the coronavirus upon the indebtedness, only with whether the respondent would have been insolvent apart from the effect of the coronavirus.
Arnold Ayoo (instructed by Athena Law, of Manchester) appeared for the appellants; Simon Passfield (instructed by DAC Beachcroft) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Doran and another v County Rentals Ltd (t/a Hunters)
