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What is a Winding Up Petition?
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What is a Winding Up Petition and Can My Company Stop It?
A winding up petition is an extremely serious statement of intent by a creditor in shutting down your company due to unpaid debts through the route of compulsory liquidation. 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.
Winding Up Petition: A complete guide for company directors
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 your company will be wound up.
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.
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Why have you received a winding up petition?
Receieving a winding up petition is an extremely serious event, 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.
Many creditors will first issue a statutory demand against your company before opting to serve a WUP, although they do not have to do this. In order to petition for the winding up of your company, a creditor must be owed a debt of £750 or more.
Immediate consequences of receiving a winding up petition
When a creditor issues a petition for winding up, this will need to be advertised in the London Gazette. This means that your bank and other creditors are likely to become aware of the situation immediately. In order to protect their own interests, the bank will often freeze your company bank accounts, rendering trade impossible.
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When would a creditor issue a winding up petition?
If one of your creditors is owed £750 or more, the debt is not in dispute, and they have unsuccessfully tried to recover the debt via standard channels, 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 also can be used as evidence that your company is in fact insolvent and unable to meet its financial obligations.
Who can issue a winding up petition?
Trade suppliers, HMRC and the banks commonly issue winding up petitions, with HMRC in particular being known to use this method as a way to recover debt quickly.
The cost to the petitioner is significant, however, and so a creditor typically regards this as the only course of action left open to them. 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. Due to this, it is rarely done unless all other efforts to collect the money owed have been exhausted.
What happens after a winding up petition has been issued?
Now you know what a winding up petition is and why you may have been served with one, you may be wondering 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, place it into compulsory liquidation, and sell its assets for the benefit of your creditors. They will also investigate the conduct of directors in the time preceding insolvency.
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.
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Winding up petition timeline
- Your creditor makes several unsuccessful attempts to recover their debt. They may issue a 21-day statutory demand for payment (unless they already hold a CCJ against you)
- If this remains unpaid, and there is no hope of agreeing a repayment plan, they will begin the application for winding up your company
- The petition is sent to the High Court, and served at your company’s registered address by a process server
- A date for the court hearing is set, usually 8-10 weeks following the issue of the petition although this can vary considerably
- At this point you have to act very quickly to avoid compulsory liquidation - seven days after the petition has been served, the hearing date will be advertised in the London Gazette and your situation becomes public knowledge
- On seeing the advert in the Gazette, the bank will freeze your company’s accounts, effectively preventing any further trade, unless you get express permission from the courts via a validation order to allow certain payments in and out of the company's bank account
- If no action is taken by your company, a winding up order will be granted by the court and the matter is taken out of your hands
- The Official Receiver will begin investigations into director conduct, potentially leaving you open to personal liability and accusations of misconduct, wrongful trading or other serious allegations in relation to the running of the company
Why advertise the winding up petition in the Gazette?
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 later granted under Section 127 of the Insolvency Act 1986.
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.
A winding up petition on ‘just and equitable grounds’
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. A company may also be wound up on 'just and equitable' grounds in a matter of public interest.
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Obtaining a validation order after your bank accounts have been frozen
If your company bank accounts have been frozen following an advert in the Gazette, you may be wondering how a validation order can help you carry on in trade. Trading without a validation order in these circumstances could result in claims of wrongful trading at a later stage, and potential personal liability for directors if a winding up order is granted.
It is not only your own company that can apply for such an order, however – the other party to the transaction(s) in question may also apply for a validation order to facilitate the movement of cash or assets.
It may be in their own interests to do so, even though you could be forced into closure at a later date. So what types of transaction might a validation order cover?
You would need to provide the court with strong supportive evidence that these transactions are necessary, and that they would not harm the interests of creditors as a whole. Where permission is being sought for the disposal of company property, the court will require a professional valuation of the asset to ensure that creditor interests are not harmed by the sale.
Attempting to trade without a validation order once a winding up petition has been issued, or to move or dispose of company assets, is a breach of director duty and will have serious ramifications if your company is liquidated.
It is not only your own company that can apply for such an order, however – the other party to the transaction(s) in question may also apply for a validation order to facilitate the movement of cash or assets.
It may be in their own interests to do so, even though you could be forced into closure at a later date. So what types of transaction might a validation order cover?
- Cash payments to and from the company’s bank account, such as the payment of staff wages
- Disposal of property owned by the company
- ‘One-off’ transactions not typical of everyday trade
Attempting to trade without a validation order once a winding up petition has been issued, or to move or dispose of company assets, is a breach of director duty and will have serious ramifications if your company is liquidated.
Can you stop a winding up petition?
Once you receive a winding up petition, the future of your company will depend on the actions you take and how long you wait to react to the petition. In general you have the following four main options for avoiding liquidation and the compulsory closure of your business:
1) Enter into informal negotiations or a formal Company Voluntary Arrangement (CVA) to come to an agreement and create a payment plan with the petitioning creditor
2) Apply to the court for an adjournment in order to allow the company to explore a company administration procedure. If the court grants the administration order it would halt any legal action being taken against your company
3) Have the petition dismissed if you dispute the validity or accuracy of the debt and have evidence to support this. A petition could also be dismissed if it has not be served on you correctly
4) Find sufficient funds to satisfy the creditor's payment demand. If the company has any valuable assets that could be used as leverage, then asset financing may be a last resort fundraising method to consider.
1) Enter into informal negotiations or a formal Company Voluntary Arrangement (CVA) to come to an agreement and create a payment plan with the petitioning creditor
2) Apply to the court for an adjournment in order to allow the company to explore a company administration procedure. If the court grants the administration order it would halt any legal action being taken against your company
3) Have the petition dismissed if you dispute the validity or accuracy of the debt and have evidence to support this. A petition could also be dismissed if it has not be served on you correctly
4) Find sufficient funds to satisfy the creditor's payment demand. If the company has any valuable assets that could be used as leverage, then asset financing may be a last resort fundraising method to consider.
Dismissing or defending the winding up petition in court
By paying the debt in full, or arranging an instalment plan, you may feel that the company is safe from further action in relation to the winding up petition, but this is not the case. Other creditors could still come forward to ‘take control’ of the petition and recover their own debt by winding up your company – this is called ‘substitution.’ This is why it is important to have the petition withdrawn from the court record if possible.
What if the petition has already been advertised?
If the winding up petition has been advertised in the Gazette and your bank accounts are already frozen, you may still be able to seek an adjournment, but any further delay will completely eliminate the chances of recovery.
Realistically, you will have to start taking action within days of being issued the petition if you want to avoid liquidation. Even so, if the hearing has not yet taken place there is still hope. Contact one of our insolvency practitioners immediately to find out what can be done in the later stages of the winding up process.
Realistically, you will have to start taking action within days of being issued the petition if you want to avoid liquidation. Even so, if the hearing has not yet taken place there is still hope. Contact one of our insolvency practitioners immediately to find out what can be done in the later stages of the winding up process.
Are you disputing the debt? An injunction to restrain the advertisement
Clearly, placing the advert in the London Gazette is a pivotal moment during this process, so delaying or averting this step is a valuable objective for the company and its advisors. So what would be required to successfully obtain an injunction to restrain the advert? Would your company be eligible, and what supporting documentary evidence is necessary?
The case for an injunction must demonstrate that a substantial dispute exists surrounding the debt, and be supported by witness statements detailing the grounds on which the application is based.
It must be shown that your company irrefutably disputes the existence or the amount of the debt, or that the debt in question can be set-off against monies already owed to your company by the creditor.
The case for an injunction must demonstrate that a substantial dispute exists surrounding the debt, and be supported by witness statements detailing the grounds on which the application is based.
It must be shown that your company irrefutably disputes the existence or the amount of the debt, or that the debt in question can be set-off against monies already owed to your company by the creditor.
If the application is successful, an injunction is usually granted temporarily until a full court hearing can be arranged where the legitimacy of the dispute is discussed.
What happens if the court grants a Winding Up Order?
A winding up order is the 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.
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.
Investigations after a winding up order and liquidation
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's declining financial position.
Even though you enjoy limited liability as a director of the company, in certain circumstances you and other directors may be held personally liable for some or all of the company’s debts.
Under insolvency law, a company must cease to trade as soon as directors are aware that it is insolvent, or is likely to be insolvent in the near future. By being issued with a winding up petition, this can be seen as you continuing to trade past the point of insolvency.
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.
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Real Business Rescue can provide professional assistance if a winding up petition has been issued against your company. We cannot emphasise too strongly that you need to act quickly to avert liquidation. Doing nothing is not an option, and will mean the end for your business.
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