When companies receive a Winding up Petition it marks the start of a process which if not dealt with swiftly, will ultimately result in the Compulsory Liquidation of the company and sale of its assets. Seeking professional advice fast is the best way to defend against the petition and maximise the chances of a reaching a more favourable outcome.
WHAT IS A WINDING UP PETITION?
A Winding up Petition is a formal document issued by a company Creditor in the Court, which requests them to force a company to cease trading and enter Compulsory Liquidation. A Creditor must be owed at least £5,000 to apply for a Winding up Petition, and will usually be applying it as a last resort, having already tried to reclaim their debt via a statutory demand or bailiff action. A Winding up Petition will result in a company’s bank account being frozen as soon as the bank becomes aware, and additional Creditors will have the opportunity to ‘piggyback’ on the back of the original petition should they also become aware of it.
WHAT WILL HAPPEN IF I DO NOTHING?
If a Creditor has grown tired of trying to recover a debt amicably and is threatening to apply for a Winding up Petition but has not yet done so, then failure to take action will most likely result in them applying to the Courts for a Winding up Order. Once they have done this, the Courts will set a time and date for a hearing of the petition and your Creditor will serve the petition upon you, at least 14 days’ before the hearing. Your Creditor will then advertise the petition in the London Gazette, which may encourage more of your Creditors to endorse the petition, and will prompt your bank to freeze your company account even if it’s in credit.
If no action is taken at this point, the hearing of the petition will proceed and the Winding up Order may be made. If the order is made your company will enter Compulsory Liquidation. This will result in the sale of company assets, the closure of the company and an investigation into the conduct of the Directors and company practices.
WHAT WILL THE EFFECTS OF COMPULSORY LIQUIDATION MEAN FOR MY COMPANY?
Compulsory Liquidation is often regarded as the least favourable insolvency process, as there are potentially higher fees, lower returns and the removal of the opportunity for an orderly cessation of trade and a possible restart.
MY COMPANY HAS BEEN ISSUED A WINDING UP PETITION, WHAT CAN I DO?
If you have been threatened with or have already been issued a Winding up Petition, it is imperative independent professional advice is sought immediately. A delay in taking action to deal with the situation could result in a far worse outcome.
If the debt is disputed, the Court and the petitioning Creditor will need to be informed. If the dispute has not been resolved by the petition hearing date, the Court will give guidelines about how the issue will be dealt with. But could make the order to wind up the company.
If the debt is not disputed and the debt can be repaid in a reasonable timeframe, arrangements need to be made with the petitioning Creditor in the first instance. If the Creditor accepts payment terms, the hearing of the petition will still take place, but the Court will adjourn the petition to give the company time to pay.
If no action is taken, it is highly likely the Court will grant a Compulsory Winding up Order. This action will result in the company being placed into Compulsory Liquidation. The Official Receiver will become the Liquidator, but may choose to appoint an Insolvency Practitioner that are on their register to act as Liquidator. The Directors will not be able to nominate their preferred Liquidator unless they are a Creditor of the company.
The Official Receiver has a duty to investigate the cause of the company’s failure and to investigate the actions of the Directors. The company will be forced to stop trading, staff will be made redundant and the assets (if there are any) will be sold.
It may still be possible for the Directors or shareholders to purchase the business and assets for use in another company structure, but the Liquidator is obliged to sell to the highest bidder.
CAN THE PETITION BE CHALLENGED?
If a Director disputes a petition and the petitioning creditor refuses to withdraw, a defence will need to be lodged in Court at least five days prior to the hearing. The defence will need to include details of the reasons for the dispute and some evidence that will support the defence of the petition. If the company agrees with part of the claim, this will need to be dealt with separately and ideally paid in full with costs before the hearing.
If a defence has been submitted prior to the first hearing, the Judge will listen to reasons for the defence and assess whether to grant an adjournment of the hearing to give the two parties a chance to resolve the dispute before the second hearing.
WHAT IF I DISPUTE THE DEBT CLAIMED IN THE WINDING UP PETITION?
The petitioning Creditor and the solicitor of the petitioning Creditor, (if a solicitor is instructed) needs to be informed of your dispute in the first instance. The Directors need to write to them providing the reasons for the dispute and request the Winding up Petition is withdrawn.
If an application to withdraw the petition is refused, and the Directors feel they have bona fide reasons for the dismissal of the petition, it is possible to apply for a Court injunction. An injunction will prevent the petition being advertised in the London Gazette. If the petition is advertised the company bank accounts will be frozen and other Creditors will be able to find out about the hearing. (For more information about this see “What will happen when an advert is placed in London Gazette?”)
If the dispute has not been resolved prior to the hearing, then the Directors can choose to defend the Winding up Petition. If a choice to defend has been made the Court will provide directions on how your defence will be handled at the planned hearing.