Steps to Stop a Winding Up Petition Before It’s Too Late

A winding up petition is the most serious legal action a creditor can take. It is the start of a formal court process to compulsorily liquidate your company. Under Section 122 of the Insolvency Act 1986, a creditor can petition the court if a company is deemed “unable to pay its debts” usually proven by a failed Statutory Demand or a balance sheet insolvency test.Once a petition is served, you have a “Golden Window” of roughly 7 days before it is advertised in the London Gazette. If you fail to act during this time, your bank will likely freeze your company accounts under Section 127, making it impossible to trade.

The Legal Basis: How the Court Defines Insolvency (Section 123)

To successfully stop a petition, it helps to understand the two tests the court uses to determine if a company should be wound up:

• The Cash Flow Test: The company is unable to pay its debts as they fall due.
• The Balance Sheet Test: The company’s total liabilities outweigh its assets, including prospective and contingent debts.

If you can prove the company passes these tests or that a rescue is more beneficial to creditors than liquidation, the court has the discretion to dismiss or adjourn the petition.

Tactical Options to Stop the Process

1. Disputing the Debt (The Injunction)

If you have a legitimate “counterclaim” or a bona fide dispute on substantial grounds, you can apply for an injunction to restrain the advertisement of the petition.

Pro Tip: If a creditor uses a petition to force payment of a debt they know is disputed, it may be viewed as an Abuse of Process, and the court may dismiss the petition and award costs against them.

2. Using a Moratorium (CIGA 2020)

The Corporate Insolvency and Governance Act 2020 (CIGA) introduced a powerful tool: a 20-business day moratorium. This gives directors “breathing space” to explore a rescue plan without the threat of legal action. During this time, the winding up petition is effectively paused.

3. Formal Insolvency (CVA or Administration)

If the debt is undisputed but the company is struggling, formal procedures provide the strongest legal shield:

• Administration: Filing a “Notice of Intention to Appoint” (NOI) triggers an automatic moratorium, halting all legal action immediately.
• Company Voluntary Arrangement (CVA): If you propose a CVA and it is supported by 75% of creditors, the court will typically dismiss the winding up petition. This allows you to pay back debts over 3–5 years while remaining in control of the business.

4. Validation Orders (Section 127)

If your bank accounts have already been frozen, you must apply for a Validation Order. This is a court order that “validates” specific transactions (like wages or supplier payments), allowing the company to survive while you resolve the petition.

Comparing Rescue Options: CVA vs. Administration

What Happens After a Winding Up Order?

If a hearing results in a Winding Up Order, the company enters compulsory liquidation. However, the court still has the power to intervene:

• Rescission Order: Under Paragraph 9.10 of the Practice Direction, you can apply to set aside the order, usually within 5 business days, if you can prove the debt has been settled or there was a procedural error.
• Stay of Proceedings: Under Section 147(1), the court can “pause” the liquidation to allow for a late-stage rescue, such as a CVA.

The key to stopping a winding up petition is speed and technical accuracy. By engaging an insolvency practitioner early, you can move the conversation from “liquidation” to “rescue” before the bank freezes your accounts.

If you are facing a petition or a bank freeze, contact us today for a solution-focused approach to saving your business.