In the recent decision of Re A Company (also known as A v B) the High Court considered the shifting burden of proof imposed by the two-stage Covid-19 test on a creditor’s winding up petition under the Insolvency Practice Direction relating to the Corporate Insolvency and Governance Act 2020 (the Act). This case highlights the obstacles creditors face when presenting winding-up petitions since the start of Covid-19, as proving that the financial difficulties pre-dated can be a challenge.
The Act came into force on 26 June 2020 and introduced new procedures to help rescue companies in financial distress due to the Covid-19 pandemic and economic crisis. The Act imposes temporary restrictions on creditors’ winding up petitions in circumstances the company would be able to pay its debts.
After the two-stage test, creditors are restricted from presenting a winding up petition, during the relevant period (from 1 March 2020 until what is now 30 September 2021) on the grounds of a company’s inability to pay its debts unless they had reasonable grounds for believing that Covid-19 had not had a financial effect on the company or that the debt issues would have arisen anyway.
In this case, Kelly J dismissed the creditor’s winding up petition as it failed the second of the two-stage approach to the Covid-19 test.
The first step is for a debtor company to show that Covid-19 had a financial effect on it before the winding up petition was presented. Kelly J determined that the first stage was satisfied by an increase in the company’s debtors and difficulties with its workers self-isolating, leading to project delays, cashflow consequences and a fall in turnover after the start of the pandemic.
At that stage, the burden shifted to the petitioning creditor to demonstrate that the company would still be insolvent if the Covid-19 financial effect was ignored. The court was not satisfied by the petitioning creditor simply comparing the company’s debt levels with those from earlier years. The creditor had failed to discharge the burden of proof required and the petition was dismissed.
This is a further example of the difficulties that creditors face when presenting winding-up petitions since the start of Covid-19. However, with restrictions soon to be lifted, creditors are invited to get in touch with us to take the preliminary steps necessary to try and recover its debts so that they are ready to act when these changes come into force.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.