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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 quickly is the best way to defend against the petition and maximise the chances of reaching a more favourable outcome.
What is a winding-up petition?
A winding-up petition is a formal document issued by a creditor in the court, which requests it to force a company to cease trading and enter compulsory liquidation. A creditor must be owed at least £750 to apply for a winding-up petition, and will usually be implementing 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’ and attach to the original petition. The court will set a date when the petition will be heard and considered.
What will happen if I do nothing?
If a creditor has grown tired of trying to recover a debt amicably and is threatening to or has already issued a winding-up petition on your company, failure to take action will most likely result in the courts issuing a winding-up order.
What is a winding-up order?
A winding-up order is the next stage of the winding-up procedure. It is a court order placing your company into compulsory liquidation. If a winding up order is made, a liquidator will be appointed by the court who will sell all assets and distribute any proceeds to creditors.
Compulsory liquidation is the process which follows a winding up order. The sale of company assets is followed by the closure of the company and an investigation into the conduct of the directors and company practices.
The official receiver will become liquidator but may choose to appoint an insolvency practitioner 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.
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.
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 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 from 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.
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. If the dispute has not been resolved before the hearing, then the directors can choose to defend the winding-up petition.
London Gazette and Validation Orders
Once the petition has been served, within seven days the company will be advertised in the London Gazette, informing creditors of the company’s insolvent position. This gives other creditors the opportunity to ‘piggy-back’ the petition, or start a new one, if the original creditor is paid.
All company bank accounts will be frozen, once their bank knows that a petition has been served. This is usually through the advertisement in the Gazette. If the company needs to make payments from any of the company bank accounts that have been frozen, an application for a validation order will need to be made.
The validation order application should be made to the court in which the petition hearing is taking place. It also needs to be served on the petitioning creditor. The application will need to include a cash flow forecast, a statement of affairs and a proposed payments list including an explanation of why the payments should be paid. This application needs to convince the court that making payments will be beneficial to both the creditors and the company.
The process for rescue
If you’re aware that your company is struggling, acting quickly can open up opportunities for rescue.
- Discuss the options
- If you want to rescue the company or save the business, it is always better to do this when the petition has only been threatened, as the options available are limited and more complex to implement if the petition has been issued. However, whether a winding-up petition has just been threatened or has been issued, it is crucial that you get professional advice quickly. The first step is to get in touch with one of our insolvency consultants who will discuss your company’s financial position and the options available. This will be done initially over the telephone, with a more in-depth assessment being conducted in a free face to face consultation at a later date. During this meeting, we will be able to give you an idea of how viable the future of the company is, and an appropriate course of action can be decided.
- Instruct us to work for you formally
- When a decision is made to have us act on your behalf, the directors will need to do this by board resolution. We can supply the required documentation if you are unsure how to do this.
- Implement the rescue plan
- Once instructed our professional team will work with you to formulate a plan of action that will best suit your aims and objectives. The options that are available will be wholly dependent on what stage the winding-up petition is at and whether or not the petition has been threatened or has been issued. There are many more options available when the petition has only been threatened, so it is imperative for directors to seek help at the earliest opportunity.
What are options and how can they help save my company?
If the core business is viable but overwhelming debts have made it unworkable, there are a number of rescue alternatives available.
Depending on the amount of time the company has before the petition is issued will determine how many options are available.
Rescue options if the petition has been issued:
- Administration or pre-pack administration via a court application. The application will be made by us and is part of the process for administration after a winding up petition.
- Administration or pre-pack administration by qualifying floating charge (QFC) holder appointment (i.e., a bank or factoring company which has a floating charge can appoint their own insolvency practitioner). They are also referred to as a QFC appointment. These procedures allow you to get the business back on track through restructuring.
- Creditors voluntary liquidation (CVL), This is only available if the petitioning creditor agrees to drop the petition (petitioning costs will usually need paying and the creditor may request some provisos before doing so). A CVL will allow you to appoint your own insolvency practitioner during the liquidation.
- Company voluntary arrangement (CVA). The petition fee and solicitor costs paid by the creditor will usually need to be paid, and the creditor may request some provisos before dropping the petition. This process would enable you to keep the business running and pool creditor debts to be paid off in affordable monthly amount.
It is essential that the petitioning creditor is not paid off without conducting a financial and business review as well as receiving some professional advice about the company’s options. Paying off the petitioning creditor does not always have it dismissed. If another creditor becomes aware of the petition, they will be able to ‘take over’, ‘adopt’ or ‘attach to’ the petition when the other creditor drops it. The attaching creditor would then need to be paid to have the petition dismissed.
In some circumstances, it may be the best option to allow the petition to run its course and let the company enter compulsory liquidation. Alternatively, if the directors would prefer to nominate their own liquidator for a company voluntary liquidation, this can be done quickly if the petition has only been threatened. If a petition has been issued, the permission of the petitioning creditor is usually required.
Winding-up petitions are a serious matter which shouldn’t be ignored. If you are being threatened with a winding-up petition, it is better to act before the threat is actioned, escalating into a situation where all control is taken out your hands as a director. Contacting us regarding your debts before a winding-up petition is enforced against you opens the possibility of other routes forward for the business, such as administration, a CVL or a CVA.
How we can help
We can assess the situation of your company and go through the available options open to you and their appropriateness for your particular set of circumstances. Our advisors are friendly, empathetic, and guided by heavily regulated insolvency guidelines to ensure we reach the best possible outcome for you and your creditors. Get in touch today for a free chat with our advisors. All initial consultations are given on a no-fee, no-obligation basis, so you have nothing to lose.