Court of Appeal given the opportunity to consider the CIGA 2020 “Coronavirus test” for winding-up petitions
Readers will recall that the under the temporary measures imposed by Sch 10, Corporate Insolvency and Governance Act 2020 (CIGA 2020), upon issuing a winding-up petition, a preliminary hearing was held at which the so-called “Coronavirus test” would be considered. Essentially this test required to the petitioner to show that (a) coronavirus had not had a financial effect on the debtor company, or (b) the debt would have arisen even if coronavirus had not had a financial effect on the company. If the test was not met, then the petition would be dismissed.
In one of the cases of its kind, HHJ Cadwallader, sitting as a High Court judge, had to consider an appeal of a decision made at the preliminary hearing dismissing a petition as it failed to meet the Coronavirus test. This was therefore a rare opportunity for the Court to consider the practical application of the coronavirus test.
The petitioners in Doran issued their petition against the debtor company, County Rentals Ltd, on the basis of unpaid rent in the sum of c.£65,000 which the debtor company (a managing agent employed by the petitioners to collect rent for various properties they owned) owed.
The petition was issued after CIGA came into force, and at the time the temporary measures in CIGA, including the Coronavirus test, applied. In the petitioners’ view the Coronavirus test was met.
However, the District Judge at first instance dismissed the petition on the basis that it was not likely that the Court would be able to make an order under section 122(1)(f) Insolvency Act 1986 having regard to the Coronavirus test. The District Judge had also noted what he described as “a strangeness” about the petition, as the petitioners had not questioned the outstanding payments that were the subject of the petition for over six years.
The petitioners’ appeal against the District Judge’s decision was unsuccessful. HHJ Cadwallader said that there was ample reason for the Court to conclude that it was not likely to be able to make a winding-up order. This was because even if the debtor was now unable to pay its debts as they fell due, it was unlikely the Court would be satisfied that it would have been so unable even if coronavirus had not had a financial effect on it. The petitioners relied solely on the fact that the rental income allegedly not paid to them had fallen due for payment before the pandemic started and this was far from sufficient to discharge the burden upon them.
The judge also rejected a contention by the petitioners, that the District Judge had erred in holding that the “financial effect of coronavirus” could prevent a determination of insolvency where coronavirus had nothing to do with the indebtedness, as confused.
That suggested, he said, that where coronavirus had nothing to do with the indebtedness, the coronavirus test ought not to prevent the petition from proceeding. However the Judge held that “… the coronavirus test has nothing to do with the effect of the coronavirus upon the indebtedness, only with whether the company would have been insolvent apart from the effect of the coronavirus.” The full judgment can be accessed here.