In the first case Newman v Templar Corp Ltd  EWHC 3740 (Ch) heard before Christmas but only recently reported, the judge took the view that the low threshold test for determining whether coronavirus had had an impact on the financial position of the company was to be taken as settled law. For more details about that the coronavirus test and the case see our previous blog here.
In the second case of Re PGH Investments Ltd v Ewing  EWHC 533 (Ch) ("PGH Investments") the judge offered some helpful insight into the meaning of 'financial effect'.
In PGH Investments, although it was determined that the debtor company was not liable to pay the alleged debt, the judge went on to consider the 'coronavirus test' having heard full argument on the point and in case the matter went any further.
Of note is the view taken by the judge that the definition of 'financial effect' in paragraph 21(3) of the Corporate Insolvency and Governance Act 2020 is wide, and it is sufficient for a company to demonstrate that its financial position worsened either "in consequence of" or "for reasons relating to" coronavirus", acknowledging that it would be sufficient for the purposes of para.5(1)(c) of Schedule 10 to the 2020 Act to demonstrate a prima facie case that coronavirus had an indirect financial effect.
In this case, it was argued that coronavirus had an indirect financial effect on the debtor company because the travel and social restrictions in place as a result of coronavirus prevented them from fulling their obligations under an agreement, which in turn resulted in them becoming liable to pay the alleged debt.
However, the judge found that the debtor company would not have overcome the 'coronavirus test' (had it needed to) because it had not provided any evidence (at all) to demonstrate that coronavirus had had a financial effect on the business, whether that was directly or indirectly. The Court confirmed that, although the threshold of the 'coronavirus test' is low, simply asserting that the business has been affected by coronavirus, is not enough.
This decision acts as a further reminder to debtors that they must not be complacent as to what evidence they produce to show that the 'coronavirus test' has been met. Even though most businesses have suffered as a consequence of coronavirus it is clear that simply making broad assertions as to the financial effect that coronavirus has had on the business, is unlikely to succeed.
For companies that have suffered financially and face a winding up petition, it is helpful to know that the court will take into account indirect financial effect when assessing whether the coronavirus test is met.
For further information on this topic please contact Amelia Sharkey at Squire Patton Boggs by telephone (+44 113 284 7000) or email (email@example.com). The Squire Patton Boggs website can be accessed at www.squirepattonboggs.com.
This article has been reproduced in its original format from Lexology – www.Lexology.com.
UK court provides further clarity on the ‘coronavirus test’ for winding up petitions
The case of Newman v Templar Corp Ltd  EWHC 3740 (Ch) came before the courts in December 2020 and provides a helpful example as to when a winding up petition can overcome the ‘coronavirus test’ set out in Schedule 10 of the Corporate Insolvency and Governance Act 2020 (“CIGA”). The judge also concluded that the low threshold test in Re A Company (2020) EHC 1551 should be taken as the settled approach to these type of cases.
CIGA came into force on 26 June 2020 temporarily prohibiting the issuing of winding up petitions unless the ‘coronavirus test’ was met, and prohibiting winding up petitions being presented after 27 April 2020 based on statutory demands. This prohibition is currently in place until 31 March 2021 (unless extended) – see here for our previous blog setting out the detail.
The coronavirus test requires the courts to firstly look at whether coronavirus has had a financial effect on the company or whether the grounds for the petition would have applied even if coronavirus had not had a financial effect on the company before allowing a winding up petition to proceed.
The case of Re A Company  EHC 1551 placed the evidential burden of showing that coronavirus has had a financial effect on the debtor before the presentation of the petition on the debtor itself. Judge Barber concluded that this was a low threshold and a debtor only need to establish a prima facie case that they had been financially impacted by the coronavirus before the presentation of the petition.
Turning to the facts of Newman v Templar Corp Ltd, a winding up petition was filed against Templar Corp Ltd (the “Company”) for unpaid wages. The Company argued that they were waiting for an investment before they could pay employees’ wages but because of the travel restrictions imposed because of the pandemic, the investor could not sign the investment agreement. The Company issued several broken promises to its employees that the investment would soon arrive and their wages would be paid. The Judge found these broken promises to be of significance as it suggested there was no confidence that any investment would actually occur.
Judge Agnello concluded that the evidence provided by the Company offered nothing to indicate that the reason for non-payment and failure to invest was because of coronavirus. No investment agreement, email exchange or explanation from the investor was provided and it was even questioned why the investment agreement needed to be completed face to face in the first instance. The Judge therefore concluded that the evidence did not establish a prima facie case and distinguished it from Re A Company as Judge Barber in that case, had more detailed evidence to deduce that the low threshold test was met.
It was held that the low threshold of showing that coronavirus had a financial effect on the Company was not satisfied, and went on to list the winding-up petition for a hearing.
Newman v Templar Corp Ltd is a reminder to debtors, that although the low threshold test is advantageous to a debtor and a petition is relatively easy to defend by producing evidence that shows coronavirus has impacted them, they must not be complacent as to what evidence they produce.