Winding Up Petition
Winding Up Petition
What is a Winding Up Petition?
If a company cannot pay its debts, it might be served with a winding up petition. A winding up petition is an application to close or ‘wind up’ a company, usually, because it is in financial difficulty. If the application is successful, the business will face compulsory liquidation, so a winding up petition is one of the most severe actions a company can encounter.
If your business is presented with a winding up petition, it’s vital you know what to do next. At James Edward & Associates, we can help you through the process and protect your business and personal interests. Alternatively, if you are a creditor faced with a business that cannot pay its debt to you, we can talk you through the legal steps – including issuing a winding up petition – and help you get what you are owed.
An outline of the winding up process
A creditor can apply to the High Court to wind up a company that owes it money. Usually, the creditor will appoint a solicitor to help it do this after several unsuccessful attempts to recover the debt owed (including a statutory demand).
Any creditor can make a winding up petition if:
- It is owed £750 or more*
- It can prove that the debtor company cannot pay its debts.
The petition must include details of the debt such as the amount, how it arose, and how long it has been overdue. Once a winding up petition has been issued, it must then be served on the debtor company. When being issued, the Court will also set a hearing date – which is typically eight to ten weeks later, although could be longer if the Court is facing a backlog. After a company receives a winding up petition, it must act quickly and may wish to issue an application for an injunction to restrain a notice being advertised in the London Gazette, such as if it has a bona fide dispute in respect of the debt. Alternatively, they may wish to dispute the debt, pay the debt, or could seek to enter into a company voluntary arrangement (CVA), administration or creditors’ voluntary liquidation.
One of the worst things about receiving a winding up petition for companies in debt is that its financial difficulties are made public. After the court has served the petition, and seven days have passed, the creditor can advertise the petition in The Gazette. This warns the debtor company’s bank, other creditors, and other relevant parties about what is happening. At this time, more creditors can align themselves with the petition, or take over the action if the company pays the original creditor in full.
The court will issue a winding up order if the petition is granted following the hearing. The court will put an official receiver (OR) in charge of the liquidation at this stage and the OR will begin selling the company’s assets to help pay its debts to the petitioner (and other creditors who register to claim money that is owed). Any legal disputes will also be settled at this point.
Please note that Scotland has different rules on winding up a company and the above is in respect of winding up petitions issued in England and Wales.
*The Corporate Insolvency and Governance Act (Coronavirus) (Amendment of Schedule 10) Regulations 2021 were introduced by the Government to give smaller businesses more protection during a challenging time. As such, temporary restrictions make it harder for creditors to apply to wind up a business. The temporary measures were introduced on 1 October 2021 and apply until 31 March. These tighter restrictions include:
- An increase in the debt threshold owed from £750 to £10,000
- A requirement for creditors to give debtor businesses 21 days to come up with a payment proposal before they can proceed with the winding up action (creditors can apply to the court to remove this obligation).
The winding up petition must also include a statement confirming that the regulations have been adhered to (https://www.gov.uk/wind-up-a-company-that-owes-you-money)
What happens when a winding up petition is issued?
Once a company receives a winding up petition, it must seek legal advice ASAP to stop the company from compulsory liquidation. A winding up petition is only the first step in the liquidation process, so the company receiving the issued petition must not panic.
Once the debtor’s situation is advertised, everyone is made aware that the company is struggling financially, which can negatively impact its operations. For example, many suppliers might refuse to continue to work with the debtor, and banks typically freeze the company’s accounts.
Furthermore, once a petition has been presented to the court, any payments made by the company could later be ‘clawed back’ should a winding up order be made and the company enter liquidation. To proceed safely, a debtor company may want to apply to the court for a validation order for any such payments to be made out by the company.
Obtaining a validation order can help a business to continue trading after its bank accounts have been frozen. An application for a validation order is made to the courts and a hearing (separate from the winding up petition hearing) will decide whether the bank accounts should be unfrozen and give the company permission to make the payments it needs to make.
In some cases, the validation order will allow the company to trade as usual for a set period (e.g. until the winding up court hearing). However, the Court usually places specific restrictions on what types of transactions can be made. For example, it might allow the company to pay its staff, pay essential suppliers, or take actions that are beneficial to the creditors. Transactions that could harm the interests of creditors are rarely allowed.
Trading without a validation order could result in wrongful trading claims and breaches of director duty if the court grants the winding up order. Likewise, companies must not attempt to dispose of company assets without a validation order after receiving a winding up petition.
How long does it take to issue a winding up petition?
The time it takes will often depend on the notice given to the company in the form of a Letter Before Action or service of a Statutory Demand (or both). Generally, a company may be given 21 days from the date of service before the creditor can present a winding up petition to the Court, although may give less notice once the restrictions under The Corporate Insolvency and Governance Act 2021 no longer apply.
Once the petition has been issued and served by the creditor to the company’s registered office, the creditor must wait seven days before advertising the petition in The Gazette and do so at least 7 days before the hearing. The hearing would usually take place eight to ten weeks after the petition has been issued, although this will heavily depend on the Court’s diary.
Who can issue a winding up petition?
Any creditor can issue a winding up petition to enforce payment of a debt by a failing company if they meet the criteria set out above and a petition may also be issued by the company itself. However, issuing a winding up petition comes at a cost and two of the main expenses include the following:
- £302 court fees
- £1,600 petition deposit (to manage the winding up).
When you add solicitor fees, this makes going to court difficult for smaller creditors, not least because they will only have a chance of getting these fees back if the debtor company can afford to repay them. Furthermore, there is no guarantee that they will get what they are owed. Indeed, following compulsory liquidation, trade creditors often receive less than 10% of the money due (if anything). As such, many creditors prefer to explore other options to recover the income owed to them.
Large creditors such as HMRC and the banks are more likely to pursue the winding up process as they can afford to do so. Indeed, HMRC makes about 60% of all winding up petitions.
What are the grounds for winding up?
If a business is owed £750 or more (temporarily £10,000), it can apply for a winding up order. To make a successful application, the creditor must prove that the debt legally exists. Usually, this is done by issuing a 21-day statutory demand which goes unpaid by the creditor. Alternatively, the debt can be proven if the creditor already holds an unmet County Court Judgment (CCJ).
A hearing will decide whether the grounds for winding up have been met. If a company is found insolvent and unable to pay its debts, the court will issue a winding up order. However, there are other situations where a winding up petition can be used.
If a shareholder believes that a company is being mismanaged, they may make a winding up petition. This is called a ‘just and equitable winding up petition’. It is used to deal with company shareholder disputes, including where shareholders have reached a 50/50 stalemate and cannot agree on company governance. Whether or not a company is wound-up on just and equitable grounds is at the court’s discretion, and it might propose other remedies to save the company from liquidation.
What options do I have if our business receives a winding up petition?
If your business receives a winding up petition, it is essential to know the options available to you. A winding up petition does not have to mean the end of your company. Many businesses go on to a successful future once the situation is resolved. Nevertheless, you must not ignore a winding up petition. Instead, you should seek legal advice to ensure the best way forward for your business. This might be:
Paying the creditor's demand
If your company can find the money to pay the creditor (e.g. by selling valuable assets, refinancing, etc.), this can stop the petition from going any further. However, if possible, you should do this before the petition is advertised. After this time, other creditors might join the petition or decide to take their own action. If the debt is paid after the petition is made, the creditor might also want you to pay its legal costs.
Agreeing to a payment plan
If your creditor(s) agree, you could make an informal repayment arrangement. However, this is not legally binding and is open to future disputes. A better option to rescue companies in financial difficulties and satisfy creditors is a company voluntary arrangement (CVA). Through a CVA, the debtor agrees to pay creditors some, or all, its debts. In return, all legal action against the debtor stops (so long as the terms are met).
Under a CVA, creditors might receive less than they are owed. Nevertheless, many understand that the liquidation process is not guaranteed to repay their total debt, so they are willing to enter a CVA to get back some money. A CVA is only possible if the debtor and at least 75% of the creditors agree to the arrangement.
Creditors might agree to a CVA if they are confident that the business can navigate its current financial situation and become profitable in the future. It might also allow the business relationship between the parties to continue. A CVA repayment plan is one of the most common methods to stop winding up petitions.
Applying to the court for an adjournment order
A debtor company can apply to the court for an adjournment order. This will give you crucial time to weigh up your options. Such options include administration or providing your business with more time to repay the debt. If an adjournment order is granted, all legal action against the company is frozen. If you decide to enter administration, you will get the time to explore restructuring options or voluntary liquidation, which can be more favorable than compulsory liquidation.
Applying to the court for a dismissal
If you have evidence, you might be able to persuade the court to dismiss the petition, for example, by disputing the legality of the debt or the amount of debt if under the required threshold. You can also apply for a dismissal if the petition was incorrectly served or if you believe it has been issued on malicious grounds. Our specialist solicitors can help you with this.
Postponing the advertisement in The Gazette
You might be able to postpone the petition from being advertised if you act quickly. This gives the parties breathing space to resolve the matter. Changes to the law mean that the obligation to advertise the petition only applies if the court has established that it is likely to make a winding up order, so disputing the debt can postpone or stop the advert altogether. But you will need legal advice to make this happen.
Suppose the petitioning creditor does agree to postpone the advertisement. In that case, it may be necessary to seek an injunction to stop the publication and seek a hearing to have the winding up petition struck out by the courts.
Applying for a validation order
As established, once made aware that a business is facing liquidation, a bank might freeze its accounts and effectively stop it from trading. Applying for a validation order can help a business to operate during this difficult time. However, banks often find out about the petition before it is advertised, so it is vital to act quickly if you suspect a winding up petition is going to be made.
Do you have to serve a statutory demand before a winding up petition?
A statutory demand is a written and formal request made by a creditor for the repayment of a debt.
A creditor can serve a statutory demand against any company that has repeatedly failed to pay what it owes. The demand formalises the debt collection process and helps to prove that the negligent company cannot pay its liabilities.
In most cases, a creditor will serve a statutory demand before a winding up petition. This is because an unpaid statutory demand proves that a debt is outstanding. When applying for a winding up petition, the creditor must demonstrate that a debt is owed. The statutory demand meets this purpose. If the debt is disputed, the court might dismiss the petition.
However, a statutory demand is not strictly necessary before issuing a winding up petition. A creditor can also use a CCJ issued against a company to prove it is in financial difficulties.
How do I protect myself from personal liability if the company is wound-up?
If the court makes a winding up order, the OC will liquidate your company’s assets to repay its creditors. The OC will also investigate the directors’ conduct in the period leading up to the liquidation and check for any unusual transactions. If evidence of misconduct is uncovered, the director could face stiff penalties even director disqualification. As such, if you are a company director issued with a winding up order, you won’t want to become personally liable.
Things you must not do before the formal insolvency procedure include:
- Make a preferential payment to a specific creditor which makes them better off than other creditors
- Repay any loans to yourself, friends, or family before HMRC or the other creditors are paid
- Make a personal guarantee to provide security for company borrowing. Doing this will make you personally liable if the debt is not repaid. If you have made a personal guarantee, seek legal help immediately
- Continue to trade if you know that the business is insolvent. If you do this, you might be held personally liable for the debts incurred by the company from the date you knew about the insolvency
- Hide any accounts, books, records, bank statements or other financial records. Instead, you must ensure these are correct, available, and protected.
Contact our specialist team to discuss how we can help you
In 2020-21, the number of company insolvencies was relatively low. But, with the temporary restrictions on winding up petitions due to Covid-19 set to be phased out, they are likely to increase. With winding up petitions to return as a viable tool for many businesses, debtors and creditors should seek specialist legal advice to help guide them through any issues over company debts.
At James Edward & Associates, we understand that unpaid debts are an issue for creditors. We work with them to recover the maximum amount of money possible, including interest, compensation, and expenses. For debtors, we can help you through the winding up process to ensure the best possible outcome for you and your business.
Our expert solicitors provide legal services for individuals and businesses in London, across the UK, Europe, South America, and the USA. To find out more, contact us today on +44 7441912822 or email info@jamesedwardassociates.com and learn more about how we can help you.
Learn more about how winding up petitions work – https://www.thegazette.co.uk/all-notices/content/101087
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