Winding-Up Petitions: Guidance for Companies
A winding-up petition is a court application presented by a creditor seeking an order that a company be wound up under the Insolvency Act 1986. It is typically issued on the basis that the company is unable to pay its debts as they fall due.
This article explains what a winding-up petition is, how the process operates, and the procedural options available to a company once a petition has been received.
What Is a Winding-Up Petition?
A winding-up petition is a formal application to the court requesting the compulsory liquidation of a company. The most common ground relied upon is that the company is insolvent.
Insolvency is often evidenced by the non-payment of a statutory demand, although a petition may also be presented where a creditor can otherwise demonstrate that a company is unable to pay an undisputed debt.
Once presented, the petition places the company within the court’s insolvency jurisdiction.
Consequences of a Winding-Up Petition
Following service of a winding-up petition, the creditor is generally entitled to advertise it in the Gazette. Advertisement gives public notice of the proceedings and may prompt banks and other stakeholders to take protective measures.
In practice, banks frequently restrict or freeze company accounts following advertisement. This can affect the company’s ability to trade and meet ongoing obligations.
If the court grants the petition, a winding-up order is made and a liquidator is appointed. Control of the company then passes to the liquidator, and the company’s affairs are wound up in accordance with insolvency legislation.
The Winding-Up Procedure
In many cases, the winding-up process begins with the service of a statutory demand under section 123(1)(a) of the Insolvency Act 1986. A statutory demand is a formal written demand requiring payment of a debt exceeding £750 within 21 days of service.
If the statutory demand is paid within the 21-day period, the process comes to an end and no further insolvency action can be taken on the basis of that demand.
If the debt is disputed on genuine and substantial grounds, the company may apply to the court to set aside the statutory demand. Where a statutory demand is successfully set aside, it cannot be relied upon as evidence of insolvency for the purposes of a winding-up petition.
If the statutory demand is neither paid nor set aside within the 21-day period, the company is deemed unable to pay its debts for the purposes of the Insolvency Act. The creditor is then entitled to present a winding-up petition to the court.
Once a winding-up petition is presented, it must be served on the company. There is usually a short period between service and advertisement of the petition in the Gazette. During this period, the company may seek to resolve the matter by payment, agreement, or court application.
If the petition is advertised and not resolved, it will proceed to a hearing. At the hearing, the court will determine whether the statutory grounds for winding up are established and whether a winding-up order should be made.
If the court grants the petition, a winding-up order is made and a liquidator is appointed to realise the company’s assets and distribute them in accordance with insolvency law.
Paying the Debt and Withdrawal of the Petition
Where the debt is not disputed and the company has sufficient funds, payment of the debt together with the petitioner’s costs may result in the creditor agreeing to withdraw the petition. Payment is generally more effective if made before advertisement, as this avoids the wider consequences associated with publicity and third-party intervention.
Disputing the Petition
A winding-up petition should not be used where the debt is genuinely disputed on substantial grounds. If a company disputes the debt, it may apply to the court to restrain advertisement of the petition or seek its dismissal.
The court will assess whether the dispute is bona fide and supported by evidence. A petition will not ordinarily be dismissed where the dispute is weak, technical, or raised solely to delay payment. The question as to why it was not disputed at an earlier point in time will be raised as plenty of opportunities would have been presented by the debtor to raise dispute it.
Negotiating with the Creditor
It is common for companies to engage with the petitioning creditor following receipt of a winding-up petition. Negotiations may lead to repayment arrangements, temporary forbearance, or the provision of security. Any agreement should be documented clearly and, where appropriate, reflected in the formal withdrawal of the petition.
Injunctions to Prevent Advertisement
Where a petition has been presented but not yet advertised, a company may apply to the court for an injunction restraining advertisement. This is typically pursued where payment or resolution is imminent or where the debt is disputed. Such applications require prompt action and supporting evidence.
Insolvency and Directors’ Duties
If a company is insolvent or insolvency is probable, directors must have regard to their duties under insolvency law. Decisions taken after insolvency is foreseeable may be subject to scrutiny.
Seeking early advice allows directors to consider restructuring or formal insolvency procedures where appropriate and to manage risk in accordance with their statutory duties.
Summary
A winding-up petition is a formal insolvency process with defined procedural stages. The options available to a company depend on the nature of the debt, the company’s financial position, and the timing of any response.
Understanding the process and acting within the relevant timeframes is essential to determining the appropriate course of action.
Speak to a Solicitor today
If you require any assistance with winding-up proceedings, or if you have been served with a statutory demand, please contact us by sending an email to info@lyoncroft.co.uk, calling us on 020 3576 7170, or complete a contact-us form. Our offices are in Park Royal, West London and you can find our address at the bottom of the page.
This article has been authored by Abdullah Suker, Managing Director of Lyon Croft Law.
