Everything you need to know
One of the reasons why company insolvencies are at historic lows right now is because creditors are severely limited in taking recovery action.
Under normal circumstances they’d be able to issue statutory demands for non-payment of debts and if these weren’t successfully settled then they could move forward to petition a court for a winding up petition to be brought against the debtor company.
Both of these actions are currently suspended until the end of March 2021, although there is a legal loophole that allows some winding up petitions to proceed, even during lockdown.
This loophole is that the debts incurred have to have been nothing to do with the impact of Covid-19.
When the Corporate Insolvency and Governance Act 2020 passed, Schedule 10 of the Act set out two “coronavirus tests” for cases that, if met, would allow them to proceed.
- If the coronavirus has not had a financial effect on the debtor company
- The debtor company would have been unable to pay these debts even if coronavirus had had a “financial” effect on them
Because every legal term is subject to test and clarification – it’s no different regarding the definition of “financial effect”.
The courts have to determine if the debtor is worse off specifically because of the Covid-19 and what material effect it has had on the company.
If they find that the pandemic hasn’t really affected the business financially then they could allow the winding up petition to proceed.
Unfortunately there’s no definitive sum set out that provides guidance on how low a financial threshold would be to proceed or what evidence creditors would need to show to prove their case
With so many variables, it was inevitable that a case would test these suppositions and so it proved in the case of Newman v Templar Corp Ltd
The specifics of the case is that Newman bought a winding up petition against the company for unpaid wages.
Templar argued that they were waiting for additional investment before they could pay employees’ wages but argued that because of the travel restrictions imposed by the lockdown, the prospective investor couldn’t sign the investment agreement.
On investigation it was established that this explanation had been used several times before to various other employees who were also awaiting payment.
The presiding Judge Agnello found that these broken promises were significant in the case as it suggested there was no confidence that any actual investment would actually occur, with several witnesses being told the same story previously.
Based on this evidence, the judge found that the company’s reason for non-payment of wages & failure to secure additional funds was because of the coronavirus, to be implausible.
No copy of investment agreement was submitted, nor any email exchanges or any other evidence from the investor. The company also couldn’t reasonably explain why an investment agreement had to be completed in person anyway.
The Judge concluded that, in their opinion, the threshold proving that coronavirus had a financial effect on the company hadn’t been satisfied on this occasion and subsequently listed the winding-up petition for a hearing.
2021 – A year of change?
This case is an example and a warning to businesses as we move towards a lifting of the year of lockdowns.
Right now the clear advantage lies with debtor companies – but for how much longer?
At the time of writing, the limitations on recovery actions are due to expire within 14 days so there could be a flurry of creditor activity very soon.
If you’re worried about the damage the coronavirus did to your businesses and profitability then get in touch with us.
After a free initial consultation, you’ll be in a better position to understand your options and what you can do to make sure you’re not caught out by a quick-acting creditor.