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Corporate Insolvency and Governance Act 2020 (“CIGA”) – winding up provisions

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All of us in business have done a lot of crystal ball gazing since the pandemic began to take hold and it’s no different when trying to react to CIGA, and in particular its temporary provisions. While CIGA states that these temporary provisions will only take effect during the relevant period (defined as ending on 30 September) it also includes what are often referred to as ‘Henry VIII Provisions’ which give the government power to make further amendments without having to go back to parliament. 

If the government’s dealings with the Job Retention scheme are anything to go by (it was initially introduced for three months but has since been extended), we may see the temporary amendments remaining in place into the autumn.

It appears as though the overriding objective of the temporary provisions is to give any business struggling due to the COVID-19 pandemic every chance of survival.  Anyone considering taking steps to wind up another company, a slow paying customer perhaps, will need to take a moment to look at the specifics of the case. Simply issuing a statutory demand and waiting for the time limit to expire will no longer suffice. Petitions presented after 27 April 2020 on the back of a statutory demand served after 1 March 2020 will be automatically void, regardless of the debt and the circumstances surrounding it.

Furthermore, it is not currently possible to wind up a company on insolvency grounds unless the creditor can persuade the court that the Coronavirus has not had a financial effect on the company. The Act then goes on to provide that the court can wind up a company that has suffered to some degree due to the Coronavirus if it can be shown that the grounds of the petition (an unpaid judgment debt or proving to the court the company’s insolvency) would have occurred even if coronavirus had not taken its toll. This will not be an easy task and in many circumstances there will be a lot of grey areas.

For example, a Company is unable to pay its debts owing to the loss of its largest customer in February 2020. The customer operated out of its head office in Paris and terminated the contract owing to the uncertainty around Brexit. The headlines of this case would certainly suggest the financial hardship suffered by the company is unrelated to the epidemic. However, if its directors make representations to the court that they could easily have replaced the lost income with new customers but for the lockdown and a dramatic decline in demand, the case becomes less cut and dried. Clearly it’s difficult to say whether or not a judge would have sympathy for such an explanation, but given the other generous business support schemes introduced by the government, the courts may take the view that the objective of the Act is to give every company the best chance of survival and err on the side of caution.

The Act also deals with the unique and messy set of circumstances where a company has been wound up after 27 April. That winding-up order is void and the official receiver, liquidator or provisional liquidator may be directed to restore the company to the position it was in before the petition was presented. Although the officeholder will not face any liability for acting in accordance with the void order, there will be questions asked about who should fund losses suffered during the period when the company was thought to be in liquidation.

Dominic Dumville

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