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

Under Schedule 10 of the Corporate Insolvency and Governance Act 2020, a preliminary hearing is not confined to taking the petitioner’s case at its highest. The court must consider whether the company is unable to pay its debts and whether a winding-up order is likely to be made even without coronavirus having had a financial effect. The creditor bears that burden. Non-payment does not automatically establish inability to pay. The court may consider the surrounding circumstances, including an apparent belief that payments were made to a designated account, statements of account, the absence of an earlier complaint and the possibility of mistake. A debt accruing before the pandemic is insufficient by itself. The appeal was dismissed.

The appellants petitioned for the winding up of County Rentals Limited under section 123(1)(e) of the Insolvency Act 1986, alleging that rent had not been accounted for. The petition was dismissed at a preliminary hearing, and the appellants’ appeal was dismissed by the High Court: [2021] EWHC 3478 (Ch).

The Court of Appeal considered the proper construction of Schedule 10 of the Corporate Insolvency and Governance Act 2020 and the related Practice Direction. The central issue was whether the preliminary hearing required the court to assume that the substantive insolvency ground was established, or instead to assess whether it was likely that the ground and the coronavirus test would both be satisfied.

Appeal dismissed. Lady Justice Asplin gave the leading judgment. Lord Justice Birss and Lady Justice Thirlwall agreed.

1. Paragraph 5 of Schedule 10 of the Corporate Insolvency and Governance Act 2020 had to be read as a whole. The paragraph applied only where the requirements in paragraph 5(1) were met, including that the company was deemed unable to pay its debts on a ground specified in section 123(1) or (2) of the Insolvency Act 1986. Paragraph 5(3) therefore did not permit the court to assume that the substantive ground was established.
2. The same conclusion followed from the Practice Direction. At the preliminary hearing, the court had to determine whether it was likely that it could make a winding-up order under section 122(1)(f) of the Insolvency Act 1986, having regard to the coronavirus test. The court was not required to take the petitioners’ case at its highest or make factual assumptions in their favour.
3. The established principles concerning section 123(1)(e) remained applicable. The court could draw an inference of inability to pay from non-payment, but the inference depended on the circumstances. It should be slow to infer inability from a debt which had never been demanded, and the company should ordinarily have had an opportunity to pay.
4. The court was entitled to consider the company’s contractual obligation, its procedure for verifying bank-account instructions, its belief that it was paying the rents correctly, the statements of account, the absence of knowledge of the alleged indebtedness until March 2020, the later formal complaint and the possibility that payment to the Barclays account resulted from mistake. The alleged debt’s pre-pandemic accrual did not itself establish pre-pandemic inability to pay.
5. The appellants had not discharged the burden of showing that the company would have been unable to pay its debts even without coronavirus having had a financial effect. In the circumstances, they would have needed to show that, had notice and a demand been given before the pandemic, the company would then have been unable to pay. The court was entitled to dismiss the petition. It was unnecessary to determine the respondent’s alternative application to dismiss on the merits, although Asplin LJ considered that such case-management action could have been available.

1. Court of Appeal (Civil Division) dismissed the appeal.
2. High Court of Justice, Business and Property Courts in Manchester, Insolvency and Companies List (ChD) dismissed the appeal from the preliminary hearing: [2021] EWHC 3478 (Ch).
3. Preliminary hearing before District Judge Richmond resulted in dismissal of the winding-up petition.