Introduction

Doran & Anor v County Rentals Ltd (t/a Hunters) ([2022] EWCA Civ 1376) is a pivotal case in the landscape of corporate insolvency law in England and Wales. Heard by the Court of Appeal (Civil Division) on October 24, 2022, this case scrutinizes the application and interpretation of Schedule 10, Part 2 of the Corporate Insolvency and Governance Act 2020 (CIGA) alongside the accompanying Practice Direction. The central issue revolved around whether the restrictions imposed by CIGA to protect companies from winding-up petitions exacerbated by the COVID-19 pandemic were correctly applied.

Summary of the Judgment

The appellants, Annette and James Doran ("Dorans"), filed a petition on October 5, 2020, seeking the winding up of County Rentals Limited (the "Company") under section 123(1)(e) of the Insolvency Act 1986. They alleged that the Company was insolvent and unable to pay its debts, specifically claiming that £65,442.55 in unpaid rents had not been accounted for between 2014 and 2020. The Company contended that these sums had been mistakenly deposited into an unknown Barclays Bank account, asserting insolvency only in light of the COVID-19 pandemic's impact.

The District Judge dismissed the petition, citing insufficient evidence that the Company was unable to pay its debts prior to the pandemic. The Dorans appealed, arguing that the preliminary hearing should have evaluated their case at its highest, essentially assuming no instructions were ever given for the misdirected payments.

The High Court Judge upheld the District Judge's decision, emphasizing that the Dorans failed to sufficiently demonstrate that the Company's insolvency was independent of the pandemic's financial effects. Consequently, the Court of Appeal dismissed the appeal, affirming that the procedural safeguards under CIGA 2020 were appropriately applied.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents to elucidate the application of insolvency laws:

• BNY Ltd v Eurosail plc [2013] 1 WLR 1408: Clarified the nature of section 123(1)(e) as not merely a deeming provision but one requiring a holistic assessment of a company's ability to pay its debts as they fall due.
• Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114: Emphasized that honest but weak reasons for non-payment do not suffice to infer insolvency.
• Re Taylor's Industrial Flooring Ltd [1990] BCC 44: Reinforced that mere non-payment warrants a cautious approach unless substantiated by substantial reasons.
• In re A Company (No. 006798 of 1995) [1996] 1 WLR 491: Highlighted the necessity for courts to exercise restraint in inferring insolvency from non-payment without clear evidence.
• Re: Easy Letting & Leasing [2008] EWHC 3175 (Ch): Stressed that companies should have the opportunity to settle debts before insolvency is inferred.
• Re A Company [2022] EWHC 1690 (Ch): Asserted that the timing of insolvency assessments aligns with the hearing of winding-up petitions.

Legal Reasoning

The Court of Appeal meticulously dissected the statutory framework set by CIGA 2020. It underscored that during the "relevant period" (March 1, 2020, to December 31, 2020), winding-up petitions based on insolvency required not only proof of the underlying insolvency but also that such insolvency was independent of the pandemic's financial repercussions.

The court rejected the appellants' argument that the preliminary hearing should have assumed the worst-case scenario — that no instructions were ever given for the misdirected payments. Instead, it affirmed that the court must assess all available evidence, including the Company's assertions of mistaken payments and its belief in acting on instructions. The burden remained on the Dorans to conclusively demonstrate that the Company's inability to pay was not influenced by COVID-19.

Furthermore, the Court elucidated that the temporary regime under CIGA did not fundamentally alter the substantive thresholds for insolvency but introduced procedural safeguards to prevent exacerbated vulnerabilities due to the pandemic.

Impact

This judgment reinforces the robustness of the protections inaugurated by CIGA 2020, affirming that courts retain discretion to dismiss winding-up petitions when insolvency claims are intertwined with pandemic-induced financial strains. It serves as a precedent for future cases where petitions are filed under similar temporary legislative frameworks, emphasizing the necessity for clear and substantial evidence of insolvency apart from external economic factors like COVID-19.

Additionally, the decision delineates the scope of preliminary hearings, reiterating that courts must engage in comprehensive fact-finding rather than making presumptive judgments. This ensures that companies are not unduly penalized and that creditors must present cogent evidence to substantiate their claims.

Complex Concepts Simplified

Winding Up Petition

A winding-up petition is a legal process initiated by creditors when a company is unable to pay its debts. If successful, the court can order the company to be liquidated.

Corporate Insolvency and Governance Act 2020 (CIGA)

CIGA is legislation introduced in response to the COVID-19 pandemic to provide temporary protections for companies facing financial difficulties due to the pandemic's impact.

Schedule 10, Part 2 of CIGA

This schedule specifically restricts the ability of creditors to pursue winding-up petitions based solely on insolvency grounds unless they can demonstrate that the company's inability to pay was not caused by the pandemic.

Coronavirus Test

A legal test introduced by CIGA requiring creditors to prove that a company's insolvency is independent of the financial effects of the COVID-19 pandemic before winding-up petitions can proceed.

Preliminary Hearing

An initial court session to determine whether there is sufficient merit to proceed with a winding-up petition, rather than immediately advancing to a full trial.

Section 123(1)(e) of the Insolvency Act 1986

This section allows for the winding up of a company if it is proven that the company cannot pay its debts as they fall due.

Conclusion

The Court of Appeal's decision in Doran & Anor v County Rentals Ltd underscores the judiciary's commitment to upholding the legislative protections afforded by CIGA 2020 amidst the unprecedented economic challenges posed by the COVID-19 pandemic. By affirming that the pandemic’s financial effects must be distinctly separated from the substantive grounds of insolvency, the court ensures a balanced approach that safeguards both creditors and the viability of businesses.

This judgment not only clarifies the application of Schedule 10, Part 2 of CIGA but also sets a robust precedent for future insolvency proceedings under similar legislative frameworks. It emphasizes the necessity for thorough evidence and fair assessment, thereby fostering a judicial environment that is both just and responsive to extraordinary economic circumstances.