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What is a Winding Up Petition?
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Understanding Winding Up Petitions
A winding up petition is a 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
A winding up petition is issued against a company by a creditor and represents the first stage in a compulsory liquidation process.
A winding up petition is the most serious legal action a creditor can take against your company. If you do not respond to the winding up petition, this will start a series of events that disables your ability to trade, and ultimately means your company will be wound up by the courts.
It is imperative that you act quickly, as once the petition has been served you only have seven days before the petition is advertised in the Gazette and 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 immediately upon receiving a winding up petition will ensure you understand all your options, the ultimate aim being to prevent your company being forced into liquidation.
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Can a creditor put my company into liquidation?
A creditor can put your limited company into liquidation if you fail to pay them the money you owe. A winding up petition is the first step in the liquidation process. If you want to save your company from being placed into liquidation by its creditors, you must take swift action upon being presented with a winding up petition.
Why have you received a winding up petition?
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 and have waited at least 21 days for the debt to have been paid.
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What happens if you receive a winding up petition?
When a creditor issues a petition for winding up, this will be advertised in the Gazette following a period of 7 days.
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.
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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 tax debt which has gone unpaid.
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 costing them 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?
Once a petition has been issued and served on your company the court sets a date for a 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 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 leading up to the company becoming insolvent.
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 held at Companies House, and will cease to exist.
Winding up petition: A 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 the debt remains unpaid, and there is no hope of agreeing a repayment plan, they will begin the process of winding up your company
- The petition is sent to the High Court, and served at your company’s registered address
- 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 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 liquidation of your company will begin
- The Official Receiver will be appointed and 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 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 at risk of compulsory liquidation.
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 reversable 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 once a winding up petition has been served against your company, 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 the matter of public interest.
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Obtaining a validation order after your bank accounts have been frozen
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?
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
What if the petition has already been advertised?
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
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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