The provisions of Schedule 10 to Corporate Insolvency and Governance Act 2020 ("the 2020 Act”), along with the accompanying Insolvency Practice Direction, have significantly changed the law on creditors winding up petitions. However, there has been a paucity of reported cases on Schedule 10 and the Insolvency Practice Direction, to guide the practitioner through this new territory. Re A Company  EWHC 1551 (Ch);  BCC 773 has been the main authority, a decision of ICC Judge Barber.
To this, there can now be added a further authority, PGH Investments Ltd v Ewing  EWHC 533 (Ch) (‘PGH Investments’), a decision of Deputy ICC Judge Passfield, arising from a hearing on 1.3.21, with the decision handed down on 17.3.21.
This latest authority is illuminating though much of what is said is obiter.
In PGH Investments, the Petitioner Mr Ewing (the ‘Petitioner’) presented a creditors winding up petition (the 'Petition’) against PGH Investments Ltd (the 'Company’) on 8.9.20. The Petition was founded upon an alleged debt of £825,000 (the ‘Alleged Debt’) said to be due from the Company to the Petitioner under a guarantee/indemnity given by the Company to the Petitioner, guaranteeing/indemnifying the Petitioner in the event that, in essence, Mr Neate, the principal debtor/buyer failed to fulfil his obligations under a Share Purchase and Loan Assignment Agreement (‘the Agreement’).
On 25.9.20, the Company issued an application (‘the Application’) ‘… seeking either the dismissal of the Petition or an order restraining the Petitioner from advertising it.' (paragraph 30)
Seemingly, the Company put forward 3 arguments in support of the Application:
(1) the Company did not owe the Petitioner the Alleged Debt; alternatively,
(2) the Company could pray in aid paragraph 5(3) of Schedule 10 to the 2020 Act; alternatively,
(3) the Petition was an abuse of process as it was presented for a collateral purpose.
The existence of the Application is important to note procedurally. Normally, under the Insolvency Practice Direction, a Petition (i.e. one not subject to an application for dismissal/restraint) would be listed for a non-attendance pre-trial review, whereupon, depending on the determination by the Court under paragraph 7.1 to the Insolvency Practice Direction, the Petition might be listed for a Preliminary Hearing to determine, pursuant to paragraph 8.1 of the Insolvency Practice Direction, the likelihood of the Coronavirus Test (see below) being satisfied at a full hearing.
In PGH Investments though, procedurally the case took a different path. The Deputy ICC Judge noted, at paragraph 22:
‘At the ﬁrst hearing of the Application, on 8 October 2020, ICC Judge Mullen vacated the non attendance pre-trial review listed on 13 October 2020 (at which the court would otherwise have given directions for a preliminary hearing in accordance with para.7.1(2) of the CIGA PD), gave directions for the ﬁling and service of evidence in response to the Application and listed the matter for a hearing on 1 March 2021…’
And later, at paragraph 36:
‘…I note that ICC Judge Mullen listed the present hearing speciﬁcally for the purposes of considering the Company's claim that the Alleged Debt is genuinely disputed on substantial grounds.’
Accordingly, the 1.3.21 hearing before Deputy ICC Judge Passfield was not simply a Preliminary Hearing listed under paragraph 7.1 to the Insolvency Practice Direction. It was a hearing to determine the Application for: (1) dismissal of the Petition; and, alternatively, (2) to restrain advertisement (i.e. notice) of the Petition.
First Argument - the Company did not owe the Petitioner the Alleged Debt
Addressing the Application, the Deputy ICC Judge considered the first of the Company's arguments - that the Petitioner was not the Company's creditor, at least not to the required level of certainty for the companies court - that is: ‘…whether or not the Company has genuine and substantial grounds for disputing the Alleged Debt…’ (paragraph 37). The Court then determined this issue, concluding at paragraph 63 that:
‘…on a proper construction of the Agreement, the Company is not liable to pay the Alleged Debt to the Petitioner and, accordingly, the Petition should be dismissed.’
Having made that finding, the Court did not need to go on to consider the rest of the Application, in particular, the other 2 arguments. The Deputy ICC Judge expressly recognised this, when he said, at paragraph 64:
‘In light of my ﬁnding that the Company is not liable to pay the Admitted (sic) Debt, it is not strictly necessary for me to go on to consider the coronavirus test in para.5(3) of Schedule 10 to the 2020 Act.’
He did though go on to consider the other 2 arguments raised in support of the Application. Consequently, though it is interesting and illuminating to consider how the Deputy ICC Judge dealt with the other 2 arguments, strictly speaking, the rest of the judgment is obiter and so of only persuasive authority.
Second Argument - Coronavirus Test
Building on his exposition of the applicable legal framework at paragraphs 26 to 29 inclusive, the Deputy ICC Judge reminded himself that the ‘the evidential burden is on the Company to establish a prima facie case that coronavirus had a “financial effect" on the Company before the presentation of the Petition, that is to say the Company's financial position has worsened in consequence of, or for reasons relating to, coronavirus.’ (Paragraph 64).
On this, the Judge found that, though a ‘low threshold’, the Company failed to met this evidential burden. He found that:
(1) ‘Financial effect’ within paragraph 5(1)(c) of Schedule 10 could be indirect financial effect. Depending on the evidence, it was possible for the principal debtor Mr Neate’s financial position (his ability to secure funding to buy shares held by the Petitioner) to worsening due to the coronavirus, and for this to have a qualifying 'financial effect' on the Company/guarantor’s financial position;
(2) However, the Company had ‘…not produced adequate evidence to demonstrate that Mr Neate was unable to ﬁnd a buyer for the Petitioner's shares because of the coronavirus pandemic.’ (Paragraph 72). The sole relevant email from Mr Neate to the Petitioner did not indicate ‘…that any difficulties which Mr Neate had in securing funding for the purchase of the Petitioner's shares were caused by coronavirus.’ (Paragraph 72);
Consequently, the Deputy ICC Judge concluded that:
(1) it did not appear to him that the ‘…coronavirus had a financial effect on the Company before the presentation of the Petition…’ ; and
(2) ‘…therefore the restriction on making a winding up order in para.5(3) of Schedule 10 to the 2020 Act does not apply.’
As a result, the second argument was not a ground for dismissing the Petition.
The Deputy ICC Judge then dealt with a further alternative. That was, if he was wrong in his conclusion that the coronavirus had not had a financial effect on the Company before the presentation of the Petition, what would he then have decided. Moving to consider this, he, in essence, posed the paragraph 5(3) coronavirus test. He said ‘the evidential burden will be on the Petitioner to demonstrate that the Company would be unable to pay its debts as they fall due even if coronavirus had not had a financial effect on the company.’
Pausing there. One can say that the Deputy ICC Judge had so far correctly approached the Application to dismiss the Petition that was before him, addressing in order the 3 arguments before him (at least to the extent of dealing with the first argument then the second argument). As to the second argument (on the counterfactual basis of: if I am wrong about there being genuine and substantial grounds for disputing the Alleged Debt), he had correctly asked himself:
(a) whether or not the paragraph 5(1) of Schedule 10 provisions were met, and then
(b) whether or not paragraph 5(3) of Schedule 10 was satisfied.
However, the Deputy ICC Judge then stated that in fact, at this stage, his task was to determine an ‘anterior question’ (paragraph 74) - that of ‘…whether it is likely that the court will be able to make a winding up order against the Company, which must be determined with regard to the restriction in para.5(3) of Schedule 10 to the 2020 Act.’ [‘likely’ being emphasised in the original judgment by being in italics].
This requires some reflection:
(1) seemingly the 1.3.21 hearing was not listed as a Preliminary Hearing, where the anterior question is the question prescribed by paragraph 8 of the Insolvency Practice Direction for Preliminary Hearings. It was listed for the determination of the Application to dismiss the Petition (alternatively, an injunction to restrain advertisement)
(2) In determining whether to accede to the Application and dismiss the Petition, the Court could, if it considered the Petition doomed to failure, consider and dismiss a Petition on the basis it would be oppressive to allow such a Petition to continue to a full hearing (after damaging advertisement), like in Re A Company  EWHC 1551 (Ch);  BCC 773);
(3) in determining whether it was doomed to failure, the Deputy ICC Judge could ask himself what would be the outcome at a full hearing, but also, importantly, what would be the outcome at a Preliminary Hearing (since the Petition could still be listed for a Preliminary Hearing). This would be the ‘anterior question’ and consistent with this, the Deputy ICC Judge did ask himself and answer, this 'anterior question'.
However this approach is framed, the determination of the Court on the Coronavirus Test was emphatic, answering in a sense, both the main paragraph 5(3) question and the 'anterior question'. This is because the Deputy ICC Judge said, at paragraph 78:
‘…if I had been persuaded that coronavirus had a financial effect on the Company before the presentation of the Petition (which, for the reasons set out above, I am not), I would not have been satisﬁed that there was any likelihood of the Petitioner discharging the evidential burden of satisfying the court that the Company would have been unable to pay its debts as they fall due in any event.’
In other words, the Court found there was no chance that the paragraph 5(3) restriction on making winding up orders would not apply at a full hearing. Consequently, it was certain that the restriction would apply and, given the Company could not then be made subject to a winding up order, the Petition should just be dismissed.
Third Argument - Collateral Purpose
The third argument was collateral purpose. On this, the Deputy ICC Judge held that, if contrary to his decision, the Alleged Debt was owed by the Company to the Petitioner, then he would not have dismissed the Petition on the basis it was presented for a collateral purpose. This was because, after referring to Maud v Aabar Block SARL  EWHC 1626 (Ch);  BPIR 845 and Rose J’s observations abuse of process situations, the Deputy ICC Judge accepted the submission that:
(1) the Petitioner did ‘…genuinely want to obtain a winding up order against the Company, both because it is insolvent and because the transfer away of its only assets immediately after the presentation of the Petition…’ (paragraph 82); and also
(2) since the Petitioner was only an unsecured creditor of the Company (i.e. he held no other relevant relationships with the Company or its assets), it was ‘…logically absurd to suggest that the Petitioner…’ was ‘…not acting in the interests of his class of creditors or that the success of the Petition will operate to the disadvantage of those creditors.’ (Paragraph 82).
On the Deputy ICC Judge's primary findings, the Petition was dismissed on the sole basis that the Company did not owe the Petitioner the Alleged Debt (first argument). He did not dismiss the Petition on either the second argument or third argument.
On 18.3.21, a further decision in this area was handed down. The case is A v B  3 WLUK 312, a decision of Judge Baister. At present the judgment is not available; only a summary is available.
On 25.3.21, a further decision in this area became available. The case of Newman v Templar Corp Ltd  EWHC 3740 (Ch), a decision of Deputy ICC Judge Agnello QC, handed down a while ago on 2.12.20.
SIMON HILL © 2021
33 BEDFORD ROW
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
In respect to the application for an order restraining advertisement of the Petition, the Company also argued that:
'...this is "premature and pointless" because the Petitioner has already undertaken not to advertise the Petition without giving ten business days' notice (see para 20 above). In fact, in light of para.19(2) of Schedule 10 to the 2020 Act, the Petitioner is not presently entitled to advertise the Petition in any event.' (paragraph 31)
The Deputy ICC Judge said, at paragraphs 32 to 36 inclusive:
'It is true that para.19(2) of Schedule 10 to the 2020 Act has removed the immediate need for a company served with a winding up petition to seek an injunction to restrain the advertisement of the petition. Moreover, as the court will necessarily have to consider any alleged dispute of the petition debt at the preliminary hearing listed in accordance with the CIGA PD in order to determine whether it is likely that it will be able to make an order under s.122(1)(f) of the 1986 Act, a company may simply wait until that hearing to determine the issue.
But I see no reason why this should prevent a company from applying at an early stage for the strike out and/or summary dismissal of a petition if it wishes to do so. Indeed, there are likely to be good grounds for doing so in a case of real urgency, such as where the presentation of the petition constitutes an event of default for the purposes of a funding agreement.
In the circumstances, whilst I accept that it was unnecessary for the Company to apply for an order restraining the Petitioner from advertising the Petition in addition to seeking its dismissal, I do not consider that the Application is "premature" or "pointless"...'
 In PGH Investments Ltd v Ewing  EWHC 533 (Ch), under the subheading ‘Legislative Framework’, Deputy ICC Judge Passfield said, at paragraphs 26 to 29 inclusive:
‘By s.122(1)(f) of the 1986 Act, a company may be wound up by the court if the company is unable to pay its debts. By s.123(1)(e) of the 1986 Act, a company is deemed unable to pay its debts if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. A failure by a company to pay a debt which is due and not disputed is of itself evidence that the company is unable to pay its debts as they fall due (Cornhill Insurance Plc v Improvement Services Ltd  1 WLR 114).
A petition founded on a debt that is disputed on genuine and substantial grounds would be an abuse of process and/or is bound to fail (Mann v Goldstein  1 WLR 1091). A dispute about a petition debt may nevertheless be determined on the hearing of the petition if it is sufﬁciently simple and straightforward and all the evidence necessary to resolve it is before the court, particularly if there is a short point of law or construction (see French: Applications to Wind Up Companies (3rd ed) at 7.526).
By para.5(1) and (3) of Schedule 10 to the 2020 Act, where (a) a creditor presents a petition for the winding up of a registered company under s.124 of the 1986 Act during the "relevant period", (b) the company is deemed unable to pay its debts on the ground speciﬁed in s.123(1)(e) of the 1986 Act (i.e. the company is unable to pay its debts as they fall due) and (c) it appears to the court that coronavirus has had a ﬁnancial effect on the company before the presentation of the petition, the court may only make a winding up order against the company if it is satisﬁed that the ground in s.123(1)(e) of the 1986 Act would apply (i.e. the company would be unable to pay its debts as they fall due) even if coronavirus had not had a ﬁnancial effect on the company. By para.21(1) of Schedule 10 to the 2020 Act (as modiﬁed by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020/1483), the "relevant period" means the period which begins with 17 April 2020 and ends with 31 March 2021. By para.21(3) of Schedule 10 to the 2020 Act, coronavirus has a "ﬁnancial effect" on a company if (and only if) the company's ﬁnancial position worsens in consequence of, or for reasons relating to, coronavirus.
The evidential burden of showing that coronavirus had a "ﬁnancial effect" on the company before the presentation of the petition is on the company. In this regard, the company need only establish a prima facie case. If that is established, the evidential burden shifts to the petitioner to show that even if the ﬁnancial effect of coronavirus is ignored, the company would still be unable to pay its debts as they fall due (Re A Company (Application to Restrain Advertisement of a Winding Up Petition)  EWHC 1551 (Ch);  BCC 773 at  and -).’
 In PGH Investments Ltd v Ewing  EWHC 533 (Ch), the Deputy ICC Judge said, at paragraph 71:
‘I accept that it would be sufficient for the purposes of para.5(1)(c) of Schedule 10 to the 2020 Act for the Company to demonstrate a prima facie case that coronavirus had an indirect financial effect of the type identified by [counsel for the Company] (i.e. Mr Neate was unable to pay the purchase price for the Sale Shares and the Loan because of the coronavirus pandemic and this caused the Company to incur a liability which it would not otherwise have had). In this regard, I note that the definition of "financial effect" in para.21(3) of Schedule 10 to the 2020 Act is a wide one and it is sufficient for a company to demonstrate that its financial position worsened either "in consequence of" or "for reasons relating to" coronavirus (see para 28 above).’
In Maud v Aabar Block SARL  EWHC 1626 (Ch);  BPIR 845, Rose J said, at paragraph 29:
‘…the presentation of a winding up petition in respect of a debt which is otherwise undisputed will only amount to an abuse of process in two situations. The ﬁrst is where the petitioner does not really want to obtain the liquidation of the company at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take. The second is where the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors. Rose J cautioned that the jurisdiction of the court to dismiss a petition based on an undisputed debt on the grounds of collateral purpose must be exercised sparingly.’