Invoking ‘Covid-19 restriction’ to avoid winding-up order

A case in the High Court has highlighted the complexity involved when a company wished to invoke the ‘Covid-19 restriction’ to prevent being subjected to a winding-up order.

It said that under the Corporate Insolvency and Governance Act 2020 (the Act), the company did not have to show that the pandemic had had a direct financial effect upon it; as an alternative it could rely on an indirect effect.

The case involved PGH Investments Ltd and Mr Sean Ewing.

The issue arose after Ewing entered into a Share Purchase and Loan Assignment Agreement with a third party. PGH acted
as guarantor for the third party.

Ewing later claimed that the third party had defaulted on his obligations, triggering PGH’s liability under the guarantee and indemnity.

PGH disputed its liability to pay the alleged debt so Ewing petitioned for a winding-up order.

PGH then applied to have the winding-up petition dismissed on various grounds, including ‘the Covid-19 restriction’ introduced in the Act, which prevented winding-up petitions against companies whose finances had been affected by the pandemic.

The court granted the application to dismiss Ewing’s winding-up petition for several reasons and clarified the requirements of the Covid-19 restriction.

It said the restriction applied where a company was unable to pay its debts but established a prima facie case that, before the presentation of the petition, its financial position had worsened because of Covid-19.

In such a case, the court could only make a winding-up order if it were satisfied that the company would have been unable to pay its debts regardless of the pandemic.

PGH did not argue that Covid-19 had a direct financial effect upon it. Rather, it relied on an indirect effect, arguing that
the pandemic had prevented the third party from discharging his obligations under the agreement, thereby triggering
its liability under the guarantee and indemnity, and putting it in a worse financial position than otherwise.

To invoke the restriction, it was sufficient to demonstrate a prima facie case that coronavirus had an indirect financial
effect. The definition of “financial effect” was wide, and it was enough for a company to demonstrate that its financial position worsened “in consequence of” or “for reasons relating to” Covid-19.

Please contact us for more information about the issues raised in this article or any aspect of debt and insolvency.