CITIBANK, N.A., LONDON BRANCH v SPECIALITY STEEL UK LIMITED & ORS.

Under Schedule 10 to the Corporate Governance and Insolvency Act 2020, a creditor must reasonably believe that coronavirus had no financial effect on the company, or that the winding-up ground would have arisen anyway. At the preliminary hearing, the company need only show that coronavirus appears to have had a financial effect. The creditor then bears the persuasive burden of proving, on the balance of probabilities, that the winding-up ground would have arisen even without that effect. A downturn in revenue or trading disruption does not by itself establish the necessary causal link. The court may consider subsequent events where they illuminate an uncertainty existing when the petition was presented. A temporary safe harbour is unavailable where the evidence shows that the company would have been unable to pay its debts in any event.

Citibank presented three petitions to wind up companies connected with the GFG Alliance. The petitions relied on unpaid demands arising from receivables-financing arrangements and were presented during the temporary coronavirus restrictions on winding-up proceedings.

The court had to decide whether Citibank had held the required reasonable belief under Schedule 10, whether coronavirus appeared to have had a financial effect on the companies, and whether the companies would nevertheless have been unable to pay their debts as they fell due. The central issue was whether the statutory counterfactual was satisfied.

1. Citibank succeeded on the reasonable-belief issue under paragraph 2 of Schedule 10. A petitioner is ordinarily an outsider to the debtor’s affairs and may reasonably rely on the information available to it, including the debtor’s default, the collapse of its principal financier and administration materials.
2. The companies succeeded at the paragraph 5(1) stage. The threshold denoted by appears is low and does not require coronavirus to have been the cause, or even a cause, of insolvency. The evidence of factory closures, depressed demand, reduced revenues and losses was sufficient to show that coronavirus appeared to have had a financial effect.
3. At paragraph 5(3), Citibank bore the persuasive burden. The court had to determine whether the winding-up ground would have arisen even if coronavirus had not had a financial effect. The companies had not provided sufficient evidence of their pre-pandemic viability, the causal connection between pandemic-related losses and the March 2021 defaults, or the availability of alternative finance.
4. The evidence instead showed that the companies’ inability to pay followed the collapse of Greensill Capital (UK) Ltd, its loss of credit insurance and the resulting cessation of financing. The court found no causal link between the statutory financial effect and the winding-up ground. Subsequent events, including the failure to obtain alternative finance, could properly be considered in the particular context.
5. The court was satisfied that section 123(1)(e) of the Insolvency Act 1986 would apply even without coronavirus having had a financial effect. It was therefore likely that winding-up orders would be made. Permission to advertise was granted and directions were to be given for the petitions to be heard in open court, with consequential directions for any substantial-dispute argument.