Interpreting CIGA

Doran & Anor v County Rentals Ltd (t/a Hunters) [2022] EWCA Civ 1376What is the test for relief from a winding up under CIGA?

Overview

This appeal concerns the proper interpretation of Schedule 10, Part 2 of the Corporate Insolvency and Governance Act 2020 (CIGA) and the Practice Direction – Winding Up Petitions and the Corporate Insolvency and Governance Act 2020, which are intended to protect companies from winding up where they have been adversely affected as a result of the coronavirus pandemic.

Background

The Appellants, Annette and James Doran petitioned for the winding up of the Respondent, County Rentals Limited (the “Company”). The Dorans owned certain properties, and in early 2014, they appointed the Company as managing agent to collect rent on the properties. The Company failed to account for all of the rents, and the Dorans made a demand in the sum of £65,442.55, being the amount of rent which the Dorans believed had not been accounted from during the period from 2014 until August 2020. The Company failed to pay, and the Dorans sought to wind up the Company.

The Company argued that it had paid some of the rents into an account at Barclays Bank on the instruction of the Dorans, while the Dorans took the position that they had given no such instructions and had no knowledge of the account at Barclays. They therefore contended that the failure to pay the rents in the period from 2014 until 2019/2020 was enough to deem the Company to be unable to pay its debts as they fell due pursuant to section 123(1)(e) of the Insolvency Act 1986 (the “1986 Act”) before the coronavirus pandemic in March 2020 and before CIGA came into force in April 2020. Accordingly, they argued that coronavirus had not had a financial effect on the Company, or that the Company would still have been insolvent and unable to pay its debts in any event, such that Schedule 10 of CIGA was of no assistance to the Company.

The Decisions Below

At the preliminary hearing, District Judge Richmond dismissed the petition on the basis that it was not likely that the Court would be able to make an order under section 122(1)(f) of the 1986 Act having regard to the coronavirus test, having noted the very unusual set of facts (including that the Dorans had not queried the missing payments for six years) and that the monies were being paid, albeit into the Barclays Bank account.

Permission to appeal was granted by Snowden J, as he then was, and the appeal was heard by HHJ Cadwallader, sitting as a judge of the High Court. He dismissed the appeal on the grounds that, amongst other things, non-payment of a single undisputed debt may be sufficient to satisfy the court under s.123(1)(e) of the 1986 Act that a company is unable to pay its debts as they fall due but normally, it must be shown that the company was notified and given an opportunity to pay and that this is because it is a matter of inferring inability to pay from non-payment. The petitioners did not appear to dispute that the Company believed it was making payments to the Barclays account on instructions and there was no evidence that it was aware that it had any outstanding indebtedness to the petitioners until March 2020. In addition, the fact that the alleged debt had accrued prior to the pandemic was not evidence that the Company was unable to pay its debts as they fell due before the pandemic.

The Court of Appeal Decision

The Court of Appeal dismissed the Dorans’ appeal. The Court focused its analysis on the context and language of paragraph 5 of Schedule 10 of CIGA. Under paragraph 5(1), three requirements must be met. The first is that the petition has been presented in the relevant period. There is no doubt that that was the case here. The second is that “the company is deemed unable to pay its debts on a ground specified in section 123(1) or (2)”, and the third is that it appears to the court that coronavirus had a financial effect on the company before the presentation of the petition. The third requirement was common ground in this case.

With respect to the second requirement, the natural and ordinary meaning of the words are clear. The paragraph applies where a company is deemed unable to pay its debts on a ground specified in section 123(1) or (2). Further, if paragraph 5 is read as a whole and paragraph 5(3) is read in the light of paragraph 5(1), it is clear that the test in paragraph 5(3) (which states that the court may wind up a company only if it is satisfied that the company would be unable to pay its debts even if coronavirus had not had a financial effect on the company) applies only where the requirements in paragraph 5(1) are met. In other words, the company must be deemed to be unable to pay its debts as they fall due in order for the coronavirus test in paragraph 5(3) to come into play.

One comes to the same conclusion if one focusses the ordinary and natural meaning of the words in paragraph 5(3) themselves. In order to be “satisfied that the ground would apply even if coronavirus had not had a financial effect on the company” it is a matter of common sense that the court must be satisfied that the substantive ground itself applies in order to be in a position also to be satisfied that it would apply, even if coronavirus had not had a financial effect on the company. The court is required, therefore, to consider whether the company is unable to pay its debts as they fall due as a preliminary matter.

In this case, therefore, it was appropriate for the court to consider whether the inference that the Company could not pay its debts as they fell due could be drawn from the failure to pay the rents over to the Dorans in the circumstances. The court was entitled to consider all the relevant facts, including the Company’s undisputed evidence as to its procedure when taking instructions as to designated bank accounts; its belief that it was paying the rents over to the Dorans as they were collected; the statements of account which were rendered; the fact that the Company had been wholly unaware of the alleged indebtedness until March 2020 and that a formal complaint was not made until June 2020 after the commencement of the pandemic; and the inference that if payments had been made to the wrong account it was as a result of a mistake. Furthermore, there was nothing before the court which would have required it to assume that the Company’s belief was not genuine or that it was irrationally held.

As a result, the Court dismissed the appeal.

Judges: Lady Justice Thirlwall, Lady Justice Asplin and Lord Justice Birss

Counsel: Arnold Ayoo of Henderson Chambers (instructed by Athena Solicitors LLP) for the Appellants; Simon Passfield of Guildhall Chambers (instructed by DAC Beachcroft LLP) for the Respondent