Winding-Up Petitions: What Company Directors Need to Know
A winding-up petition is one of the most serious forms of creditor action a company can face.
It is an application asking the court to place the company into compulsory liquidation because it cannot pay its debts. Receiving a petition does not mean the company has already been liquidated, but it does mean a formal court process has begun.
Directors need to act quickly. Delaying can allow the petition to become public, increase disruption to the business and reduce the options available.
This article explains the general process in England and Wales and the steps directors should consider after a petition is received.
Why might a creditor present a winding-up petition?
A creditor can apply to wind up a company if it is owed more than £750 and can demonstrate that the company is unable to pay the debt.
The petition may follow a statutory demand. This is a formal request for payment that generally gives the company 21 days to pay or reach an agreement with the creditor.
However, a statutory demand is not the only possible basis for a petition. A creditor may rely on an unpaid court judgment or other evidence that the company cannot pay its debts.
HMRC, suppliers, lenders, landlords and other creditors may all pursue winding-up proceedings. The current GOV.UK fees payable by a petitioning creditor are a £352 court fee and a £2,600 petition deposit, in addition to any legal or professional costs.
A petition is therefore more than another demand for payment. It is a formal attempt to bring the company’s trading life to an end.
What should directors do first?
A petition should never be ignored, even if the director believes the debt is wrong or expects money to become available shortly.
Directors should obtain insolvency and legal advice immediately and establish:
- who has presented the petition
- the amount being claimed
- whether the company accepts or disputes the debt
- when and how the petition was served
- the date of the court hearing
- whether the company has other overdue debts
- what funds and assets are currently available
It is important to consider the company’s complete financial position rather than focusing only on the petitioning creditor.
Paying one debt may not resolve the wider problem if the company cannot meet payroll, tax liabilities, supplier balances or other commitments as they fall due. Up-to-date accounts, cash-flow forecasts and creditor balances will help advisers determine whether the business remains viable.
Directors should preserve the petition, financial records and all correspondence with the creditor. Decisions about continued trading, payments and company assets should also be documented.
When will other people find out about the petition?
Before the hearing, notice of the petition will normally be advertised in The Gazette, the UK’s official public record.
The timing is governed by formal procedural rules and the directions of the court. Directors should therefore rely on the dates in the petition and advice specific to their case rather than assuming they have a standard period in which to respond.
Advertisement makes the proceedings publicly available. This can alert other creditors and financial institutions to the company’s position, potentially increasing pressure on the business.
There is normally a period between service and advertisement. It is important to use that time to take advice and establish whether the petition can be addressed before its effects become more difficult to manage.
Could the company’s bank account be affected?
A bank may restrict or freeze a company’s account after becoming aware of a winding-up petition, although this is not automatic in every case.
One reason for this risk is Section 127 of the Insolvency Act 1986. If the court subsequently makes a winding-up order, certain payments, transfers and other dispositions of company property made after the deemed commencement of the winding-up may be void unless the court orders otherwise.
In a compulsory liquidation, the winding-up is generally treated as beginning when the petition was presented, rather than when the final order was made.
This does not mean that directors should assume every payment made after the petition is automatically prohibited. The legal position depends on what happens to the petition and the circumstances of the transaction. However, directors should obtain advice before making significant, unusual or selective payments.
What if the company disputes the debt?
If the company genuinely disputes whether the debt is owed, or disputes the amount being claimed, it should obtain legal advice immediately.
Winding-up proceedings involve specific legal tests and court procedures. Simply saying that a debt is disputed will not be enough. The company will need evidence supporting its position, such as contracts, invoices, correspondence, payment records or details of any valid counterclaim.
Directors should avoid making unsupported arguments or waiting until the hearing to raise the issue.
Can the company pay or negotiate with the creditor?
Where the debt is accepted, the company may be able to pay it or attempt to agree suitable terms with the creditor.
Any proposed payment must be considered alongside the company’s overall financial position and directors’ responsibilities towards creditors as a whole. Using all available funds to satisfy one creditor may leave the company unable to meet other liabilities.
An agreement should be recorded in writing and should deal with the petition costs as well as the original debt. Directors should also confirm what action the creditor will take in relation to the court proceedings.
Once the petition has been advertised, resolving the debt with the original petitioner may not necessarily resolve the wider position. Other creditors may have become aware of the proceedings and may wish to make representations to the court.
Legal advice should therefore be taken before assuming that payment or an informal agreement has brought the matter to an end.
Could restructuring or another insolvency procedure help?
Compulsory liquidation is not necessarily inevitable simply because a petition has been presented.
If the underlying business remains viable, there may still be restructuring or rescue options to consider. Depending on the circumstances, these could include refinancing, a Company Voluntary Arrangement or administration.
Where the business cannot be rescued, directors may need advice about an orderly closure and whether another liquidation route remains available.
The existence of a petition makes each of these options more complicated. Their availability will depend on factors including:
- how far the petition has progressed
- the company’s ability to continue trading
- available funding
- the value of the business and its assets
- the amount and nature of its debts
- the position taken by its creditors
Directors should not assume that proposing another insolvency process will automatically suspend or bring the petition to an end. The appropriate route must be assessed by a licensed insolvency practitioner and, where necessary, a solicitor.
What happens at the court hearing?
At the hearing, the court will consider the petition and the information placed before it.
The court may make a winding-up order, dismiss the petition, adjourn the matter or give other directions. The outcome will depend on the debt, the company’s response, compliance with the relevant procedure and any representations made by other parties.
If a winding-up order is made, the company enters compulsory liquidation. The Official Receiver will usually take initial responsibility for the liquidation, and the directors will no longer control the company.
The company’s assets will be identified and dealt with for the benefit of creditors. Its affairs and the conduct of its directors will also be reviewed as part of the usual insolvency process.
Will directors become personally liable?
A winding-up petition does not automatically make a director personally responsible for company debts, nor does compulsory liquidation automatically result in disqualification.
Separate personal liability may exist where a director has signed a personal guarantee. Liability can also arise where misconduct or a breach of duty is established, but this will depend on the facts and does not follow simply because the business has failed.
Directors should continue to consider creditors’ interests, protect company records and assets, and cooperate with professional advisers.
How Bretts Business Recovery can help
Receiving a winding-up petition can place directors under intense pressure, but decisions should be based on the company’s full financial position rather than a hurried attempt to deal with one creditor.
Bretts Business Recovery can assess the company’s finances, creditor position and prospects, explain the insolvency and restructuring options that may remain available, and help directors determine the appropriate next steps.
If your company has received a winding-up petition or is facing escalating creditor action, contact Bretts Business Recovery as soon as possible.