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 – High Court dismissing appeal – Appellants appealing – 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 and pay them, after deductions, to the appellants. From about 2013, the respondent started paying most of the rent 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 from 2014 to 2019 of over £60,000. The appellants subsequently 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 a winding-up order having regard to the coronavirus test: [2021] EWHC 3478 (Ch); [2022] PLSCS 3. The appellant appealed.
Held: The appeal was dismissed.
(1) The court’s powers to wind up a company were restricted by paragraph 5 of schedule 10 to the 2020 Act, read as a whole. Paragraph 5(1) applied where: (a) the petition had been presented in the relevant period. There was no doubt that that was the case here; (b) the company was deemed unable to pay its debts on a ground specified in section 123(1) or (2) of the 1986 Act; and (c) it appeared to the court that coronavirus had a financial effect on the company before the presentation of the petition. The third requirement was common ground in this case.
The natural and ordinary meaning of the words at (b) were clear. The paragraph applied where a company was deemed unable to pay its debts on a ground specified in section 123(1) or (2). Further, if paragraph 5 was read as a whole and paragraph 5(3) was read in the light of paragraph 5(1), it was clear that the test in paragraph 5(3) applied only where the requirements in paragraph 5(1) were met. The company had to be deemed to be unable to pay its debts as they fell due in order for the test in paragraph 5(3) to come into play.
As a matter of common sense, the court had to be satisfied that the substantive ground itself applied in order to be in a position also to be satisfied that it would apply, even if coronavirus had not had a financial effect on the company. Therefore, the court was required to consider whether the company was unable to pay its debts as they fell due.
(2) At the preliminary hearing, the court was required to consider whether it was likely that a winding-up order would be made, taking into account the effects of the pandemic. In doing so, the court might conclude that it was not likely that the court would be in a position to make an order to wind up the company having regard to paragraph 5(3) of schedule 10 because there were genuine and substantial grounds for disputing the alleged debt, and dismiss the petition accordingly.
In this case, it was appropriate for the court to consider whether the inference that the company could not pay its debts as they fell due could be drawn from the failure to pay the rents over to the appellants in the circumstances. The court was entitled to consider all the relevant facts including the company’s contractual obligation to pay over the net rents to the appellants. Furthermore, there was nothing before the court which would have required it to assume that the company’s belief was not genuine or that it was irrationally held.
Accordingly, the court was entitled to refuse to draw the inference necessary to render it likely that the company would be deemed unable to pay its debts for the purposes of paragraph 5(1)(b) of schedule 10 and the test in paragraph 5(3), included by reference in paragraph 4.2 of the Practice Direction: “Winding Up Petitions and the Corporate Insolvency and Governance Act 2020”.
(3) The onus was on the appellants to satisfy the court that the company was unable to pay its debts as they fell due even if coronavirus had not had a financial effect upon it, in order for the court to be likely to make an order pursuant to paragraph 4.2 of the Practice Direction. They chose to rely solely upon the alleged non-payment of rent in the period from 2014-2019/20 to prove an inability to pay debts as they fell due despite the pandemic.
On the facts of this case, where there was a dispute about whether the debts had been discharged and, if they had not been discharged, the natural inference was that it was as result of a mistake, it was not possible to infer from the failure to discharge debts an inability to do so prior to the pandemic.
(4) Therefore, the judge correctly concluded that the appellants had not discharged the burden on them and the coronavirus test was not satisfied and that there was ample reason for the district judge to conclude that the court was not likely to be able to make a winding-up order because the court would not be likely to be satisfied that the company would have been unable to pay its debts as they fell due even if coronavirus had not had a financial effect on it.
Arnold Ayoo (instructed by Athena Solicitors LLP, of Manchester) appeared for the appellants; Simon Passfield (instructed by DAC Beachcroft LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read Doran and another v County Rentals Ltd (t/a Hunters)
