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COVID-19: injunction granted on the basis of the Corporate Insolvency and Governance Bill

04.06.2020

COVID-19: injunction granted on the basis of the Corporate Insolvency and Governance Bill

In a judgment handed down on 2 June 2020 in Re: A Company (injunction to restrain presentation of petition [2020] EWHC 1406 (Ch), the High Court granted an injunction to restrain the presentation of a winding up petition on the basis of prospective changes to the Insolvency Act 1986 if the Corporate Insolvency and Governance Bill is enacted by Parliament in its current form.

In this bulletin, Lara Kuehl explains the decision in Re: A Company.

Should you wish to discuss this topic, or raise any other queries, please feel free to contact either the clerking team (+44 (0)20 7420 9500 or clerks@selbornechambers.co.uk) or any member of Chambers. Selborne Chambers remains fully operational and very much open for business.

 

Mark Warwick QC

 

Background

The new Corporate Insolvency and Governance Bill (“the CIG Bill”) was published on 20 May 2020.  Our previous bulletin providing an overview of the key reforms proposed by the CIG Bill can be found here.  The current expectation is that the CIG Bill will be given Royal Assent by the end of June 2020.

 

Re: A Company (Injunction to Restrain Presentation of Petition)

The application was an urgent application made by a company (“the Company”, not named in the judgment) to restrain the presentation of a winding up petition.

The Company was a high street retailer.  The landlord (“the Creditor”) of one retail unit of which the company was a tenant had filed a winding up petition but had not yet paid the court fee (therefore the petition had not yet been presented).

The winding up petition related to unpaid rent and service charge which had recently fallen due under the lease.  The Creditor was prevented by section 82 of the Coronavirus Act 2020 from seeking forfeiture of the lease on the grounds of the unpaid rent and service charge.  On 15 April 2020, the Creditor served a statutory demand in relation to the arrears of rent and service charge.

The Creditor had refused, in correspondence between the parties’ solicitors, to give an undertaking not to present the petition.

The Company applied for an injunction to restrain the presentation of the petition on various grounds, however the Court invited counsel for the Company to concentrate on a single ground, namely the significance of the Corporate Insolvency and Governance Bill 2020 (“the CIG Bill”) and this was the sole ground on which the order was made.

The Court granted the injunction sought.  The reasoning was as follows:

  • The intended policy of the provisions in the CIG Bill is self-evident.
  • It was unlikely that the petition, once presented, would be heard before the CIG Bill is enacted. Accordingly, at any future hearing of the petition, the Court would have to ask itself whether coronavirus had had a financial effect on the Company before presentation of the petition and, if so, the Court would only be able to wind up the Company if it was satisfied that the facts on which the petition was based would have arisen even if coronavirus had not had a financial effect on the Company.
  • The Court was provided with a ‘substantial body’ of evidence as to the effect of coronavirus on the finances of the company, and concluded that there was a ‘strong case (at its lowest)’ that coronavirus had had a financial effect on the Company and that the facts on which the petition was based would not have arisen if coronavirus had not had a financial effect on the Company.
  • The Court observed that the Creditor wished to invoke the procedures of the Court to present a winding up petition in circumstances where: (i) it was improbable that the Court would make a winding up order, because the CIG Bill was likely to have been enacted by the time the petition was heard; (ii) the existence of a presented petition would nevertheless cause serious damage to the Company even if it was no winding up order was eventually made. In those circumstances, the Court was entitled to take into account its own assessment of the likelihood of a change in the law which would be relevant to its decision.  In this case, Morgan J had a ‘high degree of confidence’ that schedule 10 (relating to winding up petitions) of the CIG Bill would be enacted in more or less its current form.
  • The Court referred to and relied upon the earlier (unreported) decision of Birss J in Travelodge Ltd v Prime Aesthetics Ltd [2020] EWHC 1217 (Ch), in which an injunction restraining the presentation of a winding up petition was granted on the basis of what had been said in ministerial statements (before the CIG Bill was published).

 

Comment

Although the CIG Bill has not yet been enacted (and probably will not be enacted until the end of June 2020), it already provides a strong disincentive for any creditor to present a debt-based winding up petition because it is unlikely that a winding up order will be made (and there is a risk of existing winding up orders being voided by paragraph 7 of schedule 10 of the CIG Bill) – as discussed in our previous bulletin.

However, there may still be creditors tempted to use the threat of a winding up petition to put pressure on companies, because the mere presentation of such a petition would be damaging for most companies regardless of whether any winding up order is made.

The decision in Re: A Company, together with the (unreported) decision in Travelodge Ltd v Prime Aesthetics Ltd demonstrate that the Court will not allow the insolvency process to be abused in this way.  Insolvency proceedings should not be used by a creditor to put pressure on a company in circumstances where the creditor knows that no winding up order is likely to be made.

Another point to note from the judgment is that the Court was satisfied, from the ‘substantial body’ of evidence provided, that there was a strong case that coronavirus had had a financial effect on the Company and that the facts on which the petition was based would not otherwise have arisen.

The wording of paragraphs 2 to 6 of schedule 10 of the CIG Bill suggests that the onus will be on a creditor to show that coronavirus has not had a financial effect on a company or that the facts giving rise to the petition would have arisen in any event.

However, regardless of where the onus lies, it is obviously sensible for any company seeking an injunction to restrain presentation of a petition to provide as much evidence as possible that coronavirus was the cause of its financial difficulties.  Perhaps the recent decision in Shorts Gardens LLP v London Borough of Camden Council [2020] EWHC 1001 (Ch) might have been different if the company in that case had presented evidence of how it had been affected by coronavirus, rather than seeking to rely on ‘judicial notice’ that almost all companies would be affected.

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