Can you prove COVID-19 had an effect on their business? New law creates a major consideration before pursuing a debt, and significant protection if you are being challenged.
In April 2020, the UK Government passed the Corporate Insolvency and Governance Act 2020. This piece of temporary legislation restricts the use of Statutory Demands as a basis for the winding up of companies affected by COVID-19 retrospectively from 1 March 2020 to 31 September 2020. By definition this therefore means that a company can challenge any winding up on the basis that COVID-19 has had a negative effect on their business.
The legislation does not create a ban on winding up petitions, however a petitioner will need to be sure that COVID-19 has not had a financial effect on the debtor company. The court will still make an order should it determine that the company would have been unable to pay its debts regardless of COVID-19. Considering the fundamental effect of the lockdown provisions on companies, it would seem that any petitioner would be advised not to take this step. They would need to assert that they believe there has been no effect which risks the company adducing evidence to the contrary and therefore the court finding that COVID-19 has had an effect on the company and then being faced with the resulting adverse costs.
COVID-19 will be deemed to have had the necessary “financial effect” if the company’s financial position has worsened in consequence of, or for reasons relating to COVID-19. It would seem that this is a relatively low threshold considering the contraction in the economy over the last three months.
The courts have already given an indication on their willingness to enact these provisions. In Re A Company  EWHC 1551(Ch) despite the court acknowledging that the petitioner had reasonable grounds for determining that the company would have been insolvent in any event, it held that the petitioner had not provided enough evidence to prove that the company would not have been able to pay their debts absent of any effect by COVID-19.
It is therefore apparent that any petitioner should stay alert to the fact that the courts will interpret the legislation so as to protect companies at this time. Any petitioning creditor should think twice before rendering a petition.
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