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22-03-2021

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PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch) adds to the emerging authorities on the coronavirus test in compulsory winding up, but it deals with other issues as well.

The application before Deputy ICC Judge Passfield was for the dismissal of a winding up petition presented by Sean Ewing, alternatively for an order restraining advertisement of the petition. Mr Ewing claimed that the company owed him £825,000 under the terms of a share purchase and loan assignment agreement made between and among him (as seller), a Mr Neate (as buyer) and the company (as guarantor). Much of the deputy judge’s judgment is concerned with matters of construction and is of little interest to anyone but the parties. Suffice it to note that he found, as a matter of construction, that the agreement had terminated automatically, so Mr Neate’s obligation to purchase had ceased; and in spite of there being a clause in the agreement providing that the guarantee remained in force even on termination, that the company could not be held liable so that the petition should be dismissed.

Although in those circumstances he found that he did not need to deal with the coronavirus test he did so, making three points of interest:

(1) The evidential burden is on the Company to establish a prima facie case that coronavirus had a "financial effect" on it 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.”

(2) Such financial effect, he held, need not be direct:

“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.”

He went on, however, to hold that in the case before him the company’s evidence was inadequate to demonstrate that coronavirus had had a financial effect on the company before the presentation of the petition, so the restriction on making a winding up order in para.5(3) of Schedule 10 to the 2020 Act did not apply.

(3) He went on to say,

“If I am wrong in that conclusion, 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. However, at this stage, I would be concerned with the anterior question 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.”

He then considered the meaning of “likely:”

“In Three Rivers DC v Bank of England (No 4)…Chadwick LJ considered the meaning of ‘likely’ in the context of CPR 31.17(3)(a) and rejected the submission that it means ‘more probable than not’, but also indicated that it connotes a rather higher threshold of probability than merely ‘more than fanciful’. He held that the word has, in that context, the meaning ‘may well’. In my judgment, Parliament must have intended that the word "’likely’ would have the same meaning in the context of para.19(2) of Schedule 10 to the 2020 Act. Accordingly, if I had been satisfied that coronavirus had a financial effect on the Company before the presentation of the Petition, the Petitioner would need to satisfy me that if I allow the Petition to proceed to a final hearing, it may well be able 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 it.”

He went on:

“I remind myself that the question which the court must determine under para. 5(3) of Schedule 10 to the 2020 Act is: would the Company be unable to pay its debts as they fall due if coronavirus had not had a financial effect on it before the presentation of the Petition? In order for the court to be able to answer that question in the affirmative, the Petitioner would need to demonstrate that if coronavirus had not had a financial effect on the Company before the presentation of the Petition, it would still have incurred the Alleged Debt and would still have been unable to pay it. In my judgment, the mere fact that the Alleged Debt arose after the commencement of the coronavirus pandemic does not so demonstrate. Accordingly, 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.”

Collateral purpose was also argued by the company and is of passing interest because it has been contended by companies and debtors in a number of recent cases, notably in the Maud bankruptcy before Rose J (whose judgment in Maud v Aabar Block SARL was considered) and by Snowden J. The deputy judge noted that Rose J had explained that the presentation of a winding up petition in respect of a debt which was otherwise undisputed would only amount to an abuse of process in two situations: where the petitioner was not really seeking the winding up of the company but was using proceedings or the threat of them to put pressure on their subject to take some action which the subject was otherwise unwilling to take; or where the petitioner was not acting in the interests of the class in that the winding up would be to the disadvantage of the body of creditors. He also noted that Rose J had “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.” He found that that was not the position of the petitioner in the case before him

 

James Latham
Partner

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