Updated: 7th September 2021
A winding up petition is an extremely serious statement of intent by a creditor in shutting down your company due to unpaid debts. It is the strongest action a creditor can take against your business and is often the natural next step in the debt chasing process after a statutory demand for payment has gone unheeded.
If your company is served with a winding up petition, it represents the most serious legal action a creditor can take. If nothing is done about it, the petition starts a series of events that disables your ability to trade, and ultimately means the end for your business.
It is imperative that you act quickly, as once the petition has been served you only have seven days before the company’s financial situation becomes public knowledge. The court sets a hearing date to decide whether a winding up order should be granted, and if so, the liquidation process begins.
Seeking advice and guidance from a licensed insolvency practitioner will ensure you understand all your options, the ultimate aim being to prevent the liquidation of your company.
You may have heard of a winding up petition being presented on ‘just and equitable grounds,’ but this refers to a different type of petition than those presented by creditors claiming insolvency.
If there is a shareholder dispute – for example, a deadlock on decisions in the boardroom or a shareholder who believes the company is being mismanaged - they may be able to take action using this type of petition
It's important to recognise that your company is not 'bankrupt' at this time; the correct phrase is 'insolvent' and while this doesn't necessarily mean the company is doomed, you do need to take immediate action to arrest the situation before it gets any worse. If a company is insolvent (defined by being unable to pay liabilities - such as invoices - as and when they fall due), being issued with a winding up petition by a creditor is effectively their last resort in trying to get paid. This form of action usually follows a series of unsuccessful attempts to recoup money using the standard methods of collection.
As far as your company is concerned, you may have made sincere attempts to negotiate affordable repayments in the past, but other circumstances can easily take the matter out of your control. Maybe you’ve been dealing with a severe financial situation for some time due to customers being slow to pay, for example, or have had to endure the loss of a key contract.
It is worth bearing in mind that some creditors will issue a winding up petition in a vindictive attempt to make their debtor pay quickly. If you have unexpectedly received a petition to wind up your company and suspect that this is the case, we can advise on how to deal with the situation.
Part of the legal process when a creditor issues a petition for winding up involves advertising the petition in the London Gazette, which means that your bank and other creditors are likely to become aware of the situation.
Once this happens, the chances of averting compulsory liquidation are significantly lower. In order to protect their own interests, the bank will freeze your accounts and render trade impossible without specific authorisation for the movement of money and assets.
We can help you postpone or avoid a winding-up process and subsequent liquidation, and depending on the circumstances, we may even be able to get the business operating normally again. We help companies of all sizes from large international firms to smaller businesses including new start-ups.
For more information you can arrange your free consultation with a Real Business Rescue specialist at one of 100 Offices across the UK. Alternatively you can call our specific director hotline for immediate advice from a licensed insolvency practitioner or you can download a number of business insolvency guides – including guides which discuss winding-up petitions in greater detail – from our website to help shed more light on your company situation.
If one of your creditors is owed £750 or more, they have unsuccessfully tried to recover the debt via standard channels, and the debt is not in dispute, they can issue a winding up petition with a view to closing down your company.
They must be able to prove that the debt exists, and this is usually done via a 21-day statutory demand for payment issued prior to the winding up petition. Failing to pay the statutory demand makes the debt exist in law, and allows the creditor to take winding up action.
Should your creditor already hold an unmet County Court Judgment (CCJ) against the company, they will not need to send a statutory demand as the unpaid CCJ effectively confirms the existence of the debt without doubt.
Trade suppliers, HMRC and the banks commonly use this procedure, with HMRC in particular being known to issue petitions as a way to recover debt quickly. Your creditor may believe you have deliberately avoided payment, or that you have a poor repayment history and are unlikely to concede to their requests.
The cost to the petitioner is significant, however, and your creditor might regard this as the only course of action left open to them. You should keep in mind that, although the ramifications are very serious and you have limited time to act, we may still be able to help.
Our experts have vast experience of dealing with this type of situation, and it may be possible to effect an adjournment or have the petition dismissed from court. The issue of a winding up petition is a very technical process, and if not carried out correctly the document’s legality can be challenged.
It is important to note that once the petition has been served, the court hearing will take place even if you pay the petitioning creditor in full. This means that once they are aware of the situation, other creditors can step in and use the petition to recover their own debts.
One of the downsides for creditors is the cost of issuing a WUP. Court fees are high, and when added to the cost of hiring legal assistance, the process is expensive for the petitioning party – usually falling between £1,500 and £2,000.
It is often no fault of the directors that this situation has arisen, but simply a series of unfortunate circumstances that has led to a crisis. So what happens once a petition has been issued and served on your company?
The court sets a date for the hearing, and a decision is made on whether to grant a winding-up order. If an order is granted, the Official Receiver (OR) or another liquidator will be appointed to forcibly wind up the company, and liquidate its assets for the benefit of your creditors. They will also investigate the conduct of directors in the time preceding insolvency, sometimes for up to three years before the insolvency date.
All company assets will be professionally valued with a view to selling them at a liquidation auction, and the proceeds distributed equitably between creditor groups. The company is then removed from the Register of Companies at Companies House, and will cease to exist.
Your creditor must follow a specific process when issuing a winding up petition, otherwise the document may not be legal. You might be able to challenge its legality if the correct procedures have not been carried out, so it is worthwhile hiring professional assistance to check its authenticity.
Furthermore, not all courts have the jurisdiction to grant a winding up order, so your creditor must also present their petition at the correct court, and pay a considerable sum beforehand. This is the reason why many winding up petitions are issued in relation to larger debts, rather than the £750 minimum amount.
To give you an idea of the timescale involved when a creditor issues a winding up petition, below is a timeline of events which also provides an insight into how the system works.
It is a statutory requirement that, to obtain a winding up order, all petitions are advertised in the London Gazette, which effectively alerts the public and other creditors to your situation. The banks scan these adverts regularly to protect their own interests, and it generally doesn’t take long for news to spread about a company experiencing financial trouble.
The advert is usually placed in the Gazette seven days after the petition has been served. This quickly escalates the seriousness of your position, and considerably reduces your ability to save the company.
As far as the courts are concerned the company’s potential winding up begins when the petition is presented, making any movement of company assets after this time recoverable by the liquidator if a winding up order is granted.
It is advisable to act only on the guidance of an insolvency practitioner under these circumstances, to avoid any unlawful transactions or movement of assets that could result in personal liability later on.
Sometimes it is necessary for a company to carry out transactions that are already in progress, however, or when it is deemed their sale would increase creditor returns. In these and other cases it may be possible to seek a validation order from the court, which allows the specified transaction(s) to take place.
I understand that the last people you would ever want to speak to would be a business rescue firm, but I also know that being faced with a winding up petition or order can be equally challenging. It is taking your next steps that is vital.
Option 1: Formal/informal negotiations
The involvement of insolvency professionals in formal and informal negotiations is often a positive influence on creditors, and can help to avert the closure of a business. Commonly, a Company Voluntary Arrangement, or CVA, is the procedure used to escape liquidation in these circumstances, but strict eligibility criteria apply.
Your company must be able to anticipate its cash flow and profit levels to a reasonable degree, and the business must be deemed viable in the long-term despite the seriousness of its current situation.
A Company Voluntary Arrangement would prevent further legal action in relation to the debts included in the agreement, with a single affordable monthly repayment made, rather than numerous payments to individual creditors.
Option 2: An adjournment followed by company/pre pack administration
An adjournment would provide some time for insolvency experts to determine your company’s suitability for company administration. This is another formal insolvency procedure which safeguards the company from creditor action, and prevents further interest or charges being added to the original debt.
If company administration is not possible, a pre pack administration may be suitable whereby the underlying business assets are purchased by a third party, sometimes the existing directors using their own personal funds.
Option 3: An adjournment for more time to pay/delay the advert
It may be possible to persuade the court that your company could pay in full if given more time, in which case an adjournment of the hearing date would allow for reorganisation of the company’s affairs.
Alternatively, you might believe there are grounds to argue that the winding up petition is not valid, or that details provided about the debt are not accurate. A legitimate dispute could allow you to apply for an injunction to restrain the advert in the Gazette, but this process is complex and would need the guidance of a specialist solicitor.
The petition could also potentially be dismissed because it has not been served correctly. Once it is served, an affidavit must be filed at court by the process server or creditor, to verify that the correct procedure was carried out.
Option 4: Pay the debt in full
If your company is eligible for alternative funding, such as invoice factoring or asset-based lending, you could gain access to a cash lump sum that would clear the debt in full.
There are certain aspects that need consideration if you pay the debt in full or in instalments, however, and these involve protecting both your own and the creditor’s interests.
One thing to realise when you have received a winding up petition from creditors is that this was no easy decision for them to make. It is quite a serious matter that could eventually cost a great deal of money..
A winding up order is a court order that forces an insolvent company into compulsory liquidation – a process in which the court appoints an Official Receiver (OR) to liquidate all of the company’s assets in order to repay creditors. It results when HM Revenue & Customs or another creditor sends a winding up petition (WUP) to the court after the insolvent company fails to repay a debt of more than £750 which has gone unpaid for at least 21 days.
Upon a Winding Up Petition being advertised, a company’s bank account will typically be frozen meaning business is immediately halted. While a WUP does not necessarily mean the end of your company, you will have to move fast if you want to save it and stop it being wound up.
Once the court has granted a winding up order, the Official Receiver or another liquidator will be appointed to close down the business. They will analyse your company’s affairs and assets with a view to having them professionally valued prior to their sale at auction.
Once all business assets have been realised, the liquidator will make distributions to your creditors according to their position in the repayment ‘hierarchy.’ When this is complete, the company is struck off the register at Companies House and will cease to exist.
During a compulsory liquidation procedure, the liquidator also has a duty to investigate the conduct of all directors and shadow directors during the time leading up to insolvency. They will want to interview you and your co-directors, and try to establish what led the company into such a dire financial position.
After liquidation the Official Receiver (OR) is given the task of investigating all actions taken by the directors during the time the company was trading insolvent. Part of the investigation involves looking at the company’s financial affairs for instances of misconduct or wrongful trading. They could investigate transactions, both cash and the transfer of assets, which took place up to three years before the company actually became insolvent. If evidence of wrongful trading is found, the directors could be held personally liable for some of the company debts, or may even be banned from acting as the director of any company for up to 15 years.
By consulting with an insolvency practitioner as soon as you’re issued with a winding up petition, you can receive valuable guidance and learn how to record the actions of your company to show the court that the directors fulfilled their duties while trading insolvent.