Annette Doran & Anor v County Rentals Limited t/a Hunters

The Court of Appeal considered the construction and effect of Schedule 10, Part 2 of the Corporate Insolvency and Governance Act 2020 and the accompanying Practice Direction in relation to a winding-up petition presented during the pandemic. The court held that, at the preliminary hearing required by the Practice Direction, the tribunal must consider whether the substantive ground in section 123(1)(e) of the Insolvency Act 1986 (inability to pay debts as they fall due) is likely to be made out even if coronavirus had not had a financial effect on the company; the court cannot simply assume the ground is made out or take the petitioner’s case at its highest. The petitioners bore the burden of demonstrating that the company would have been unable to pay its debts absent the effect of coronavirus and, on the undisputed evidence (including the company’s belief it had been paying rents to the petitioners and that any misdirection of payments was likely a mistake), they failed to discharge that burden. The appeal was therefore dismissed.

Background and parties: The petitioners, Annette and James Doran, presented a winding-up petition on 5 October 2020 against County Rentals Limited (the Company) under section 123(1)(e) of the Insolvency Act 1986, asserting that the Company had failed to account for rent payments totalling £65,442.55 dating from 2014 to August 2020. The Company said those sums had been paid into a Barclays account on the instruction of the Dorans; the Dorans said they had given no such instruction.

Procedural posture: The petition was listed for a preliminary hearing under the Practice Direction. District Judge Richmond dismissed the petition at the preliminary hearing on 9 February 2021. Permission to appeal was granted by Snowden J on 18 June 2021 and the appeal to the High Court was heard by HHJ Cadwallader, who dismissed it (see [2021] EWHC 3478 (Ch)). The Court of Appeal heard the present appeal and dismissed it on 24 October 2022.

Nature of the application and issues: The petitioners sought that the petition be allowed to proceed to the winding-up list. The central issues were (i) the proper construction of Schedule 10 of CIGA and the Practice Direction with respect to the preliminary hearing (the so-called "coronavirus test"); (ii) whether, at the preliminary hearing, the court must assume the substantive ground (section 123(1)(e)) is made out or instead must consider whether that ground is likely to be made out even absent the financial effect of coronavirus; and (iii) whether the non-payment of the alleged rents before the pandemic permitted an inference of inability to pay as debts fell due despite the company’s evidence that it believed it had been paying the sums to the petitioners or that any misdirection was a mistake.

Court’s reasoning and conclusions: The court set out that paragraph 5(1) of Schedule 10 requires that the company be "deemed unable to pay its debts" on a ground in section 123 before paragraph 5(3) (the coronavirus test) can operate. Read as a whole, the temporary regime imposed by CIGA and the Practice Direction requires the court at the preliminary stage to consider whether the substantive ground would be made out even if coronavirus had not had a financial effect. The court therefore rejected the submission that the petitioner’s case must be taken at its highest or that the court should assume the substantive ground applies. The petitioners bore the burden of proving that the Company would have been unable to pay its debts absent coronavirus. On the undisputed evidence — including the company’s procedures for verifying account changes, its belief it had been paying rents to the petitioners, statements of account provided and the fact the petitioners did not complain until March/June 2020 — the court was entitled not to draw the inference of inability to pay. The preliminary hearing analogue to an application to restrain advertisement meant the court could dismiss a petition where genuine and substantial disputes existed. The appeal was dismissed.

The appeal is dismissed. The Court of Appeal held that under Schedule 10 of CIGA and the Practice Direction the court at a preliminary hearing must consider whether the substantive ground in section 123(1)(e) is likely to be made out even if coronavirus had not had a financial effect and cannot assume that the substantive ground applies; the petitioners failed to discharge the burden of showing the Company would have been unable to pay its debts absent the pandemic, and dismissal of the petition at the preliminary stage was justified.

Petition presented 5 October 2020. Preliminary hearing before District Judge Richmond dismissed the petition on 9 February 2021. Permission to appeal granted by Snowden J on 18 June 2021 and hearing directed to a High Court judge. Appeal to the High Court dismissed by HHJ Cadwallader ([2021] EWHC 3478 (Ch)). Appeal to the Court of Appeal dismissed ([2022] EWCA Civ 1376).