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

The court determined three linked winding up petitions presented by Citibank as Note Trustee against three companies said to form part of an informal group (the GFG Alliance). The decision applied Schedule 10 to the Corporate Governance and Insolvency Act 2020 (CIGA 2020) and addressed three key questions: (1) whether the petitioner held a reasonable belief, as required by paragraph 2 of Schedule 10, that Coronavirus had not had a financial effect on the company or that the relevant ground would have arisen in any event; (2) whether it appeared to the court that Coronavirus had a financial effect on the companies (paragraph 5(1)); and (3) whether, if paragraph 5 applied, the ground for winding up would have arisen even if Coronavirus had not had a financial effect (paragraph 5(3)).

The judge held that it was reasonable for Citibank to hold the belief required by paragraph 2 having regard to the timing and circumstances of Greensill Capital (UK) Limited's collapse, the Companies' reliance on that finance, contemporaneous documents and the failure to pay following demand. The court accepted that it appeared that Coronavirus had a financial effect during March–December 2020 (the low threshold under paragraph 5(1)). However the court went on to apply the counterfactual test in paragraph 5(3) and concluded, on the balance of probabilities, that the Companies' inability to pay the petition debts would have arisen even absent any financial effect of Coronavirus because GCUK's cessation of funding was attributable to loss of credit insurance and concentration risk rather than to Coronavirus; consequently the petitioning creditor succeeded on the paragraph 5(3) issue. As a result the court granted permission to advertise the petitions and directed that the petitions proceed to a substantive hearing in open court.

This is a first instance Companies Court decision on three related winding up petitions brought by Citibank, as Note Trustee, against Speciality Steel UK Limited, Liberty MDR Treasury Company UK Limited and Liberty Commodities Limited. The petitions arose after demands for repurchase of purchased receivables were served following the administration and cessation of trading of Greensill Capital (UK) Limited (GCUK). The petitions were presented during the period in which Schedule 10 of the Corporate Governance and Insolvency Act 2020 restricted winding up petitions where Coronavirus had a financial effect.

Nature of the application: Citibank sought permission to advertise the petitions and for the petitions to proceed to hearing. The procedural gateway in issue was Schedule 10 CIGA 2020: (i) whether the petitioner had reasonable grounds (paragraph 2) for believing Coronavirus had not had a financial effect or that the ground would have arisen regardless; (ii) whether it appeared that Coronavirus had had a financial effect (paragraph 5(1)); and (iii) whether, applying the paragraph 5(3) counterfactual, the ground for winding up (section 123(1)(e) Insolvency Act 1986 — inability to pay debts as they fall due) would have arisen even if Coronavirus had not had a financial effect.

Facts and evidence: The companies were materially dependent on receivables financing provided by GCUK. GCUK’s principal credit insurance was not renewed and it ceased trading and went into administration in early March 2021. Citibank relied upon contemporaneous administration papers, the timing of defaults after GCUK’s collapse, and report material to form a reasonable belief. The companies, and their sole director Mr Sanjeev Gupta, relied on evidence of reduced revenues, plant shutdowns and industry reports asserting significant Covid-related market effects. The judge considered witness evidence from Mr Gupta, evidence and analysis by Mr Hudson (a restructuring practitioner) for Citibank, and material emanating from the GCUK administration and parliamentary inquiries. The admissibility and weight of Mr Hudson’s evidence was discussed; the parties agreed it may be admitted and the judge assessed the weight accordingly.

Issues framed and reasoning:

• The judge reviewed the three-stage approach under Schedule 10: petitioner’s reasonable belief (paragraph 2), respondent’s showing that Coronavirus appears to have had a financial effect (paragraph 5(1)), and the higher threshold counterfactual in paragraph 5(3) (would the ground have arisen even absent a Coronavirus effect?).
• On paragraph 2 the judge found Citibank’s belief objectively reasonable, given GCUK’s collapse, the companies’ dependence on GCUK funding and the immediate failure to meet repurchase demands.
• On paragraph 5(1) the judge accepted that it appeared Coronavirus had a financial effect between March and December 2020: there was evidence of plant closures, reduced production and revenue falls meeting the low threshold of ‘appears’.
• On paragraph 5(3) the court applied the counterfactual and found, on the balance of probabilities, that GCUK’s collapse was driven by concentration of exposure and the withdrawal/non-renewal of credit insurance rather than by a systemic Covid-induced insurance market shock. Because GCUK ceased to purchase receivables for reasons unconnected to Coronavirus, the Companies would have been unable to pay the petition debts even absent Coronavirus. The companies failed to produce sufficient contemporaneous audited or management financial evidence or credible evidence of realistic refinancing offers to displace that conclusion.

Disposition and practical outcome: Citibank succeeded on paragraph 2 and on paragraph 5(3); the Companies succeeded only on paragraph 5(1) so that paragraph 5 applied. The court concluded it was likely that a winding up order would be made, granted Citibank permission to advertise the petitions and ordered that the petitions proceed to a substantive hearing in open court, with directions to be agreed (including for dispute on the sums claimed).

At first instance the court granted permission to advertise the petitions and directed that they proceed to a substantive hearing in open court. The judge held that Citibank had reasonable grounds for the belief required by paragraph 2 of Schedule 10 CIGA 2020; that it appeared (low threshold) Coronavirus had a financial effect on the Companies (paragraph 5(1)); but that on the balance of probabilities the ground for winding up (section 123(1)(e) Insolvency Act 1986) would have arisen even if Coronavirus had not had a financial effect (paragraph 5(3)), because GCUK’s cessation of funding followed the loss of credit insurance and concentration risk rather than a Covid-caused market-wide shock. For those reasons the court found it likely that a winding up order would be made and gave consequential directions and permission to advertise.