What is a Winding Up Petition?
A winding up petition (WUP) is a legal notice put forward to the court by a creditor. The creditor petitions the court if the debtor owes them more than £750 and has not paid it for more than 21 days.
The WUP, in effect, asks the court to liquidate the company as they believe the company is insolvent. The court sends the petition to the registered address of the company with a court date. If the petition succeeds, the court process will put the company into compulsory liquidation. The proceeds of the liquidation can pay back creditors.
In 2023, the High Court received nearly 6,000 Winding-Up Petitions, with HMRC accounting for almost 46% of them
This is by far the most serious action that can be taken against your company and it is often preceded by a statutory demand. Often the company has broken any trust the creditor had and payment deals have failed.
So, the creditor reacts with the “nuclear” option. However, in some cases, we have seen creditors issue malicious petitions as a means of trying to settle disputes. We can advise how to deal with this.
In Scotland, a winding up petition is more risky for a company. See the procedural differences here
If a creditor tries to wind your company up, they are usually serious in their intent to recover the money it is owed.
So, If you have received a petition from HMRC or any other creditor then you must act quickly. Much of what we do is talk to creditors who have issued petitions and persuade them that the company has a chance of survival. This is backed up by our expertise and experience as turnaround practitioners. See our rescue stories on our site!
What are the consequences?
If the company goes into liquidation, making payments after receiving a petition will be void. A validation order is necessary to pay legal advice, accountants advice, and even wages. This will in effect stop the company from trading.
Therefore it is vital to act as soon as possible! There may still be time for a company voluntary arrangement if you act quickly – it could save your business.
What is the Process?
A creditor, such as HMRC, asks a solicitor to apply to the Court to “wind the debtor company up” to recover debts. or to stop the company making its debts worse.
When you receive a petition or a threat of a petition, remember that you must act as directors.
Before the issuing of the petition the creditor will need to set out.
- Details of the amount of the debt, how it arose and how it is overdue
- A request for the debtor’s proposals for the payment of the debt.
- A declaration regarding the creditor’s plan to file a petition if the debtor does not make a satisfactory proposal for debt repayment within a 21-day period.
Advertisement of the Petition
The creditor has to wait 7 days after giving you the petition before they can advertise it in the London Gazette. The creditor also must advertise it no less than 7 days before the petition hearing date. The main reason that the petition is advertised is for other creditors to see that the company is insolvent. They may then ‘piggyback’ on to the same petition and make a claim for their debt, serving a notice of support on the original petitioner.
It is possible to stop the advert if you act FAST. Even if your company pays the debt and stops the advertisement, the case can still go to court and become public. Taking action before a winding up petition is issued is crucial!
What happens after the WUP is advertised?
Freezing of accounts
At this stage, the bank will know of the petition. So they will FREEZE the company’s bank account to prevent any “disposition” or sale of assets at undervalue or other illegal acts by the directors. This can paralyse the company and stop it trading. It is not legally necessary for the bank to freeze the bank account, but most banks tend to do this.
Banks hire agents to search court records for companies with winding up petitions before they are even advertised. Either way, if you receive a petition you must ACT. In addition, Some credit rating agencies are publishing filed petitions.
Why do banks freeze accounts?
Well, the technical answer is under section 127(1) of the Insolvency Act 1986. If a company is wound up, any sale of the company’s property and any transfer of shares made after the commencement of the winding-up is void, unless otherwise ordered by the court. It is almost impossible for a company to continue to trade after a winding up petition is advertised.
Banks therefore assume that they have to freeze the accounts to stop assets being dispositioned. It is a safe step in their eyes.
Typically, the only method to open a new account and have the bank release the assets is by settling the debt and subsequently securing a “Validation Order”. We can advise on this process but it requires an application to court and not insubstantial legal fees. If you need advice on a validation order contact us. We have a combative law firm ready to help your company.
The Court Hearing of the Petition For a Winding Up Order
The Judge will hear the petition and if the company cannot pay and there is no evidence or defence that it can pay in the future then the Judge will issue a WINDING UP ORDER. Once this has happened the Official Receiver, who is a licensed insolvency practitioner, will start the process of liquidating the company. You MUST respond to any requests for information and records by the Official Receiver or an appointed liquidator. Failure to do so is a criminal offence
Once a company has been ordered to be wound up by the court, the Official Receiver, or the appointed liquidator, must investigate the activities of the company directors. They will want to check that they have acted properly and according to their legal and “fiduciary” duties. If the liquidator believes that the directors are guilty of wrongful trading they may recommend that the directors be disqualified for up to 15 years; however, this is quite rare.
Don’t let a winding up petition finish your company. So call us now on 0800 9700539. If the matter is urgent, call a director on 07833 240747 or email our advisors at help@ksagroup.co.uk.
How to Stop A Winding Up Petition
Once your company receives a petition you have fewer options available;
- You cannot put the company into creditors’ voluntary liquidation.
- The Court may reverse the sale, so you CANNOT sell the company or the assets.
- You cannot issue a Notice of Intention (NOI) to appoint an administrator
- You cannot issue new securities or charges
- You cannot put the company into pre-pack administration
Other than paying up there are only a few other options. You can propose a Company Voluntary Arrangement quickly or get legal advice to defend against the petition. For instance, if the debt is not agreed.
Remember lawyers may require a third party to make the payment. This happens because liquidation could void any payments from the company.
Administration
If your business is strong and has a bright future, administration can help protect your company from the petition.
Now that your company faces winding up, an expensive court process is required. The Court will need to consider the needs of all creditors and the petitioner, before granting an Administration Order.
An Administration Order, if granted by the court, will “stay” or stop the winding up petition and prevent a winding up order being made and any other legal action (except with leave of court).
The administrator, who must be a licensed insolvency practitioner, may propose a Company Voluntary Arrangement to protect the business and allow repayment of debts for up to 5 years. Alternatively, it may be sold to a new company or buyers (including you as directors).
If the business pays the debt, remember the overall debt will have increased because of the costs of the plaintiff (creditor). The petitioner will want those costs paid too.
What if we do not agree with the debt?
If the action is clearly unfair or an “abuse of court process” then you MUST take legal advice immediately.
Bear in mind that it is unlikely that if HMRC issued a winding up petition it is an abuse of process. HMRC are sophisticated creditors and in 99% of cases, any tax bill can’t be disputed.
Examples of wrongdoing include the following;
- Not allowing enough time for the debtor to pay the amounts due
- Not giving sufficient warning of legal action.
- Threatening to share the petition with your bank.
- Adding unreasonable costs to the application puts on further pressure.
You may be able to prevent the petition from being advertised and indeed have it withdrawn if it is considered an “abuse”. We can provide advice and our lawyers can seek an injunction to stop any advertisement. Alternatively, our team can negotiate with the petitioner to persuade them not to advertise it. We have considerable experience in this area.
Otherwise, in due course the petition hearing will be advertised in the London Gazette and the hearing will be heard in the High Court of Justice (Companies Court).
If the petition has already been advertised then the business could seek an adjournment of the hearing. However, to do this you will need a sound reason(s). We have a good working relationship with expert lawyers who can analyse your situation and help you to obtain an adjournment where appropriate. Call us on 08009700539.
How long does a winding up petition take?
It can take 8-12 weeks if the money owed is not paid before the eventual winding up of the company. It may be that the company can get the initial hearing adjourned and this will extend the time by about 28 days. In exceptional circumstances, the court may grant another adjournment if the company in question is on the cusp of receiving additional finance or is likely to be paid the money it is owed.
