Received a winding up petition? 9 things you need to consider

A winding up petition is a legal document that can be served by a company’s creditors when they are owed money by the company. If the debt amounts to £750 or more, then a creditor has the right to go to court and ask for a winding up petition to be issued, although courts view this remedy as something that should be reserved for when a company is genuinely believed to be insolvent, and not simply used as a means of debt collection.

It is the most serious form of action for debt recovery and is usually only a last resort after extensive attempts to obtain payment. A hearing is usually scheduled for around four to eight weeks after the court issues the petition and it is at this hearing the court may agree to the petition and make a winding-up order. This would result in liquidation, so it is vital to act as soon as notice of a winding-up petition is received if attempts are to be made to save the business. In this post, our specialist insolvency solicitors provide 9 points you should consider if you receive winding up order:

Timeline

It is important to be aware of the timeline that the winding-up procedure will follow, so those key deadlines can be met.

The first action is the filing of the petition with the court. A court fee is payable at this time. The court will consider the petition and respond with a date for the hearing, which is likely to be in the following four to eight weeks.

The winding-up petition must then be served on the company, giving notification of the hearing date and the amount of the debt. The creditor being the petitioner has to advertise the hearing in the London Gazette to make any other creditors aware of the petition. This should be done at least seven days after service of the petition and at least seven days before the hearing date

Following the publication of the advert, other creditors may attach their debts to the petition and company bank accounts are likely to be frozen which may effectively stop the business from carrying on.

Finally, the hearing will take place, with the court considering evidence from creditors. The matter may be adjourned to a later date, or alternatively the court will dismiss the petition or make a winding-up order, which will have the effect of placing the company into compulsory liquidation.

Void dispositions

Once a winding-up petition has been issued, any disposition of assets made after that date is void unless otherwise a validation order is obtained from the court and can be recovered at a later date by any liquidator. This includes payment of debts and other distributions, even where they are made in good faith.

It can be the case that those in receipt of void dispositions are unaware of the winding-up petition and will still have to pay back monies that they had received and relied upon. There are some instances in which the court may make a validation order allowing a payment to be made especially if those payments are necessary for the day to day running of the business. It is possible to obtain a retrospective validation order but exceptional circumstances would be required to obtain an order as the court’s primary intention will be to protect the pari passu principle.

Winding-up petition advertisement

It is an essential part of the process that an advert is placed in the London Gazette prior to the hearing of the petition. If this is not done, then the court will not grant a winding-up order.

The advert gives notice to other potential creditors, as well as banks and credit reference agencies, that a petition has been issued. Other creditors can then ask to join the petition as a supporting creditor. They will need to contact the petitioner’s solicitor with evidence of their own credit and attempts made to recover it, and can then attend the hearing and present evidence to the court.

Because of the serious effect of placing an advert giving notice of a winding-up petition, every care should be taken to make sure it is accurate. If mistakes are made, then the company named could have a claim for damages against whoever has placed the advert.

The seven-day window

An advert cannot be placed in the London Gazette giving details of the winding-up petition until seven working days from the date of service of the petition.  This window of time is crucial, as it gives the company a chance to settle the petition before it becomes public knowledge.

Once the advert has been placed, then a company will struggle to survive as banks may freeze accounts, customers may go to competitors and creditors may stop supplying. As other debts are added to the petition it may also be harder for a business to keep functioning. A business’s credit rating will also be damaged.

By acting quickly to contact the petitioner and trying to satisfy their demands if the debt is due, it may be possible to avoid the petition being advertised.

Disputing the debt

If some or all of the debt can be disputed on substantial grounds, then the most important consideration is acting quickly to try and prevent an advert from being placed in the London Gazette by way of an injunction.

If part of the debt is disputed, but at least £750 is owed and is not in dispute, then the winding-up process is likely to be allowed to continue.

An application for an injunction should include a witness statement from a company director or other employee explaining why the debt is disputed as well as evidence of the company’s current financial affairs and latest accounts.

If a company in receipt of a winding-up petition has a genuine cross-claim, then the court may either delay or dismiss the petition and grant an injunction preventing publication of an advert.

The company raising the cross-claim will need to do so in a timely matter, and it will need to be a genuine claim backed by substantial evidence. It will help if the claim has been raised prior to service of the winding-up petition as the court may be more likely to find a pre-existing cross-claim genuine. It is recommended that legal assistance be sought without delay in the event of a cross claim, to allow a persuasive case to be put together as a matter of urgency.

Paying the debt

If the debt is undisputed and it can be paid in full, you can stop the winding-up petition before it is advertised by making payment. You will also likely be asked to pay the cost of petition and any associated legal costs. Alternatively, the creditor may be willing to negotiate a repayment plan.

You will need to satisfy all creditors who have joined in the application to the court, not just the original petitioner, as any creditor with £750 or more outstanding can still take the action forward, even if the original petitioner has withdrawn.

Security for costs

Where a petition for a winding-up order is brought by a petitioner who may lack funds or is out of the jurisdiction, there is a risk that if the winding-up petition is dismissed and a costs order made against the petitioner, they will fail to pay, leaving the company out of pocket in respect of its legal fees.

To prevent this from happening, a defendant can make an application to the court for a security for costs order. This would require the petitioner to pay the specified amount into court or to provide a guarantee or insurance policy by way of security, so that if they lose the case, this money can be used to pay the defendant’s costs.

An application for security for costs order should be made as soon as possible after notice of the winding-up petition is received. If it seems likely for any reason that the petitioner may not pay a costs order made against it, there may be grounds for making an application.

How to stop a winding-up petition if you are insolvent

There are a handful of choices, other than paying off creditors that may allow a business to avoid compulsory liquidation if the company is insolvent.

Obtaining an administration order will pause legal action against the company and ring-fence the company’s assets, allowing an administrator to deal with debt repayment and the assets of the company.

A defendant can propose a company voluntary arrangement allowing repayment of monies owed over a period of time. If creditors are willing to accept this, then a business will be able to continue trading.

As an alternative to compulsory liquidation, it may be preferable to enter into voluntary liquidation rather than wait for compulsory liquidation. This is a more proactive approach to resolving the situation and can allow directors to stay in control of the process. It is also usually a faster method of bringing matters to a conclusion.

Summary

It is essential to act quickly if notice of a winding-up petition is received. This will ensure that your business and its assets are protected as far as possible and disruption minimised. There may be a number of options open to you, and you should carefully consider your best course of action. If possible, you should talk the matter through with a legal adviser as soon as the notice is received. The potential for recovering from a winding-up petition diminishes with time, so the quicker action is taken, the better.

At Lincoln & Rowe we understand the importance of helping our clients keep their businesses running smoothly. We have wide-ranging experience in commercial law and were named as the ‘Best Firm for Commercial Disputes in London’ in the 2019 SME Legal Awards programme.

If you would like to talk to one of our expert legal team about the best way to deal with a winding-up petition, contact the author, Dipesh Dosani, call the team on 020 3968 6030 or email us on enquiries@lincolnandrowe.com and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact an adviser or solicitor.

Dipesh Dosani Partner
Dipesh advises clients on a wide range of commercial disputes including breach of contract, directors’ disputes, shareholder remedies, partnership issues, professional negligence and intellectual property. He is also able to provide clients with advice on all aspects of insolvency as well as investigations including misfeasance, undervalue transactions, preferences, transactions to defraud creditors and wrongful trading.

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    2021-07-07T14:46:22+01:00

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