A guide to winding-up proceedings: How does the process work?
A winding-up petition allows a company’s creditors to attempt to recover money owed to them by having the company’s assets sold, with the proceeds used to pay outstanding debts. It is a serious step and should only be undertaken as a last resort.
A winding-up petition is one of the most severe actions that can be taken against a company by one of its creditors. It will potentially be the end of the business and, even if it is not, once the petition is publicised it can be extremely damaging.
When to use a winding-up petition
If a creditor is owed money by a business and no reasonable explanation for the lack of payment has been offered, the creditor could consider using a winding-up petition.
The sum owed must be more than £750 and a statutory demand should usually be served on the debtor first, before commencing winding-up proceedings although this is not an absolute requirement. Generally speaking, the sum owed will be considerably higher than £750 to warrant the expense of this type of action.
Failure by the business to satisfy a statutory demand will provide evidence of the business’s inability to pay its debts, which is one of the criteria required for a successful winding-up petition.
It is advisable to take legal advice to be sure that a winding-up petition is the best course of action. Because of the serious implications on a business, a court will not issue one lightly and all other options should also be explored.
It is important to check that no other creditor has already issued a petition or that insolvency is already under way, as there could be a risk that the creditor issuing a second or subsequent petition will be liable for legal costs of bringing further action.
The winding-up petition process
Once a statutory demand or letter of claim has been sent to the debtor, giving a deadline for payment and this deadline has passed, a winding-up petition can be drawn up and filed at court together with the court fee and a deposit for the Official Receiver. The court will seal the petition and provide the creditor with a copy.
The winding-up petition must then be personally served on the company at their registered address.
Notice of the petition should then be published by the placing of an advert in the Gazette not less than 7 business days before the hearing and not less than 7 business days after the petition was served on the company. The court will also need to be provided with a copy of the advert and certificate of compliance with the Insolvency (England and Wales) Rules 2016 or there is a risk that the petition will be dismissed.
Once the winding-up petition has been advertised, the debtor’s bank accounts are likely to be frozen, unless they are able to obtain a validation order from the court allowing certain transactions to take place. As well as seriously impacting the running of a business, this will serve as a warning to other creditors and it will be very difficult for a company to continue.
If the company does subsequently go into liquidation following the granting of a winding-up petition, then any dispositions made by directors after the winding-up process has started will be void.
The debtor company has the option to oppose the petition and file evidence with the court in response. It should be noted that documents filed with the court will generally be a matter of public record. To prevent disclosure of sensitive information, an application will need to be made for an order protecting documents from being published.
The hearing of the winding-up petition could take place in the Country Court before a district judge or in the Royal Courts of Justice before an Insolvency and Companies Court judge.
Options for the court
The court has the discretion to make any order it sees fit, usually one of the following:
- Dismissing the petition;
- Adjourning the hearing to allow more time to pay or present further evidence;
- Making an interim order requiring certain actions to be taken;
- Making an order for the winding-up of the business.
The impact of a winding-up order
In the event that a winding-up order is granted, the Official Receiver will liquidate the company’s assets and take control of the company. This means that the directors will not themselves be able to dispose of any assets.
Company employees are automatically made redundant when the winding-up order is made.
The Official Receiver and/or liquidator will recoup as much money as possible for the creditors by valuing and selling the company assets. It will also launch an investigation into the directors’ actions and why the company failed. If wrongdoing is found, then action is likely to be taken against those involved, which could result in a director being banned from acting in that capacity in the future.
The proceeds of the asset sale will be distributed to the creditors in the usual order of creditor payment, which sees creditors paid in the following order:
- Fixed charge creditors
- Ordinary preferential creditors, ie. employees who are owed pay
- Secondary preferential creditors, ie. HM Revenue & Customs (in respect of VAT, PAYE, NI contributions, student loan deductions and construction industry scheme deductions) and the Financial Services Compensation Scheme
- Prescribed creditors
- Floating charge holders
- Unsecured creditors
How you received a winding-up petition? Here’s 9 things you need to consider.
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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 a legal advisor.