A winding up petition is the precursor to the compulsory liquidation of a business due to a company’s unpaid debts. An outcome no business owner desires.
With the costs of running a business higher than ever, paying creditors can be tough if you’re seeing a downturn in sales or trying to recoup unexpected expenses.
But failing to repay debts owed to your creditors is a risky scenario. And one that could well result in a winding up petition.
It’s therefore essential to know how a winding up petition comes about, what happens if one is served against you, and what you can do about it.
And the main thing to remember? If your company is struggling to repay creditors, you must seek guidance from a licensed insolvency practitioner as soon as possible, before your options become limited.
What is a winding up petition and winding up order?
A winding up petition is an application put to the court requesting that a company be wound up. The application, in effect, asks the court to liquidate the company because the company is unable to pay its debts or for some other just and equitable reason. A petition can be presented by a creditor of the company. However, a shareholder, director or a government department can also petition to wind up a company.
The winding up petition is then heard by a court which can grant the request [to wind up the company] by issuing a winding up order.
A winding up order issued by the court puts the company into immediate compulsory liquidation.
This is a very simplified summary. As we’ll explore below, there are several important steps in this process.
Reasons a creditor would issue a winding up petition
There is only one reason that a creditor may issue a winding up petition against you; you owe them money!
Specifically, a creditor (or a group of creditors) can only issue a petition if the debt owed to them is for £750 or more.
In most cases, the creditor will have already tried to recover the balance from you over a period of time and failed.
Additionally, a winding up petition is sometimes preceded by a statutory demand. Statutory demands are a way of legally demanding that a debt is repaid within a certain period of time (usually 21 days).
After the 21 days have passed without payment, it may be concluded that the company is insolvent as it is unable to pay its debts.
For a winding up petition to be served, creditors must be absolutely certain that it is the best option for them.
It is a costly legal procedure for creditors to put forward a petition. It currently costs £2,600 for the court deposit and there is a court filing fee of £302. It is possible to do this without legal representation but to ensure the petition is correctly completed, many choose to employ a solicitor which adds to the cost of the process. For this reason it’s often treated as a last resort (even by HMRC).
Who can issue a winding up petition?
If the intention is to recover unpaid debts, the most common issuer of petitions are trade creditors, HMRC, or your bank. HMRC tends to take up the lion’s share (60%) of issuing winding up petitions.
Immediate consequences of serving a winding up petition
If a creditor or other petitioner issues a winding up petition to the court, the court will endorse the petition with the date and time of the winding up hearing. There is a 7-day window before it is publicly advertised in the London Gazette. During this time the petitioner must serve a copy of the petition on the company.
The petitioner must then advertise the petition in the London Gazette at least 7 working days before the winding up hearing.
Because the advertisement is public, your bank and other creditors will most likely become aware of your situation.
Your bank could choose to freeze your accounts to protect their own interests and other creditors to whom you are indebted may issue support to the creditor’s case.
Once these requirements have been fulfilled, the court will hear the petition on the hearing date and choose whether to grant the winding up order.
Overview of the winding up petition process
The process – from the petition to the courts to the company being placed into liquidation can be summarised as follows:
- Debt recovery attempted: The creditor makes several unsuccessful attempts to recover monies owed. They may issue a statutory demand or pursue a CCJ (county court judgement).
- Decision to issue a petition: If no payment is made, and there is no hope of agreeing a repayment plan, the creditor will complete the online application to wind up your company or instruct solicitors to assist in the process
- The court endorses the petition and a date for the court hearing is set: usually 8-10 weeks following the issue of the petition although this can vary considerably
- The petition is served: At your company’s registered address, usually by a process server
- Advertisement in London Gazette: 7 days after the petition has been served, the hearing date will be advertised in the London Gazette and your situation becomes public knowledge
- Banks and other creditors become aware: On seeing the advert in the Gazette, the bank will freeze your company’s bank accounts, effectively preventing any further trade, unless you get express permission from the courts via a validation order to allow certain payments in and out of the company’s bank account
- Winding up order granted: If no action is taken by your company to pay the petition debt or successfully defend the petition, a winding up order will be granted by the court and the matter is taken out of your hands
- Compulsory liquidation process begins: The court will pass the file to the Official Receiver who will begin assessing the company’s asset position, to see if realisations can be made to pay the company’s liabilities. The Official Receiver will also carry out investigations into director conduct, potentially leaving you open to personal liability, director disqualification or other serious allegations in relation to the running of the company and its subsequent failure
What can my business do if served with a winding up petition?
If there is anything to be done, you must act immediately upon notification that a winding up petition has been served.
Seek the help of a licensed insolvency practitioner who will advise on the best course of action. This may include:
- Entering into informal negotiations or a Company Voluntary Arrangement (CVA) to create a payment plan with the petitioning creditor
- Submitting a case for an injunction to restrain advertisement in the Gazette, provided there is a substantial, irrefutable dispute around the debt and witness statements to detail the grounds on which the injunction is being applied for.
- Applying to the court for an adjournment in order to allow your business time to explore the administration route. This would halt legal action against the company, for a time.
- Having the petition dismissed if it has not been served correctly, or if you dispute the validity or accuracy of the debt and have ample evidence to support your claim.
- Refinancing valuable assets to free-up the funds needed to repay the creditor.
In theory, you have 7 days from issue to stop the advert being published but being granted an injunction is quite rare.
In reality, it is difficult to halt the process once it’s begun unless you have solid grounds for doing so.
For this reason, the very threat of a winding up petition is worrying for business owners.
Even if the court decides to deny the petition in the end, the damage to your reputation (by banks and creditors seeing the advertisement) has already been done.
What if the petition has been wrongly served?
There are a small number of cases in which a winding up petition is wrongly served.
Winding up petitions are not legitimate debt collection tactics, for example. A creditor should not simply issue a winding up petition without thorough knowledge of the process they are initiating.
Examples of wrongdoing may include:
- Not allowing the debtor company enough time to pay
- Insufficient warning that legal action may be taken
- Threats to publicise the petition in a way that is not in accordance with regulations i.e. sending a copy directly to your bank
- Adding unreasonable costs to the application to increase pressure
It’s worth noting that HMRC is highly unlikely to serve a petition incorrectly as unpaid tax is not arguable in most cases.
Can I unfreeze a bank account after a winding up petition is served?
Once a winding up petition is served and advertised, the banks may freeze your bank accounts and your company therefore may find it impractical to trade.
In a small number of cases, transactions in and out of the business may be allowed by obtaining a validation order from the court. This is the only way to unfreeze your bank accounts once the winding up petition is advertised.
Trading without a validation order in these circumstances could result in claims of wrongful trading at a later stage and these transactions could be rendered as ‘post petition dispositions’, which effectively render such payments voidable and repayable by the recipient or by the directors who allowed the payments. This could result in potential personal liability for directors if a winding up order is granted.
Who can apply for a validation order?
- Your company: to pay staff wages or one-off transactions that aren’t typical of your day-today operations
- The recipient of the transaction: to facilitate the movement of cash or assets to them lawfully without the risk of a liquidator asking for it to be repaid once they are appointed.
How is a validation order granted?
You would need to provide the court with strong supportive evidence that these transactions are necessary, and that they would not harm the interests of creditors as a whole.
Where permission is being sought for the disposal of company property, the court will require a professional valuation of the asset to ensure that creditor interests are not harmed by the sale.
Attempting to trade without a validation order once a winding up petition has been issued, or to move or dispose of company assets, is a breach of director duty and will have serious ramifications if your company is liquidated. You would need to seek legal advice as to the correct steps to take.
Court hearing for winding up order
So what actually happens during the court hearing?
The judge will first hear the petitioner and if your company still cannot pay the debts in question, and there is nothing to suggest you could repay in the future, the judge will issue a winding up order.
After a winding up order has been made, the case is passed to the Official Receiver who initially acts as liquidator.
But the Official Receiver may also transfer the liquidation to a licenced insolvency practitioner to act as liquidator to continue the liquidation process of realising company assets to pay liabilities.
How do I protect myself from personal liability if the company is wound up?
One of our most frequently asked questions in relation to liquidation and winding up petitions is personal liability.
When a company is unable to pay its debts, directors are usually given the protection of limited liability.
However, there are three main scenarios where a director can be made personally liable for a limited company debt, including:
- Personal guarantees: If a director signed a personal guarantee for a company debt and is unable to pay it, they will be held personally liable.
- Overdrawn director’s loan: A director’s loan account is where a director takes money from the company, in a way that isn’t classed as a salary, dividend or expense. Any funds taken must be recorded. If a director takes more than they put in, the account is overdrawn and the director would then have to repay the company this debt when it is liquidated.
Improper or unlawful behaviour: Directors can also face personal liabilities if they have acted improperly or unlawfully e.g. trading while insolvent, breaching their fiduciary duty, taking unlawful dividends, or participating in fraudulent or illegal activity.
Can a winding up petition be stopped or reversed?
If a winding up order is made against your company, you will be sent a copy of the order. You can apply to rescind it within 5 working days of the order being made.
You will need a witness statement detailing your assets and debts. The application costs at least £155, depending on the court.
Applications are processed the same day of receipt and a court hearing given for 1-2 weeks in the future. At the hearing you may present your case to the judge and either be asked for more evidence or get a decision there and then.
There is no guarantee that your application will be accepted and the liquidation halted. The best way to avoid being in this situation is through seeking the help of an experienced and knowledgeable licensed insolvency practitioner as soon as a statutory demand or threat of winding up petition is made by a creditor.
Get help with a winding up petition
The bottom line is you should always aim to tackle financial difficulties before a winding up petition is filed by creditors.
This is a last resort for everyone involved because of the costs to creditors but also because of the very public nature of advertising your company debt situation.
Once a winding up petition is served, it can be very difficult to stem the chain of events that happen in relatively quick succession thereafter.
If you require guidance on unpaid debts and financial issues in your company, reach out to our team of compassionate and transparent insolvency professionals.
The earlier you seek support, the more options are available to you in the long run.