What is a winding up petition by HMRC or creditor?
Why might you have been served a winding up petition and what happens now?
A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent. Proceeds of the liquidation can be used to pay back creditors.
This is by far the most serious action that can be taken against your company and it is often preceded by a statutory demand. So what can be done about it? Often the company has broken any trust the creditor had, payment deals have failed, cheques have bounced and generally, directors have not kept their word to pay. Even though your company may have tried very hard to meet payment deadlines, your customers have been slow to pay, or sales have been lower than planned.
If you are a creditor please visit our How can I issue a winding up petition page?
So the creditor reacts with the "nuclear" option. Of course, sometimes it's not as simple as that; 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 threat of a winding up petition is even more dangerous to a company, so read our page on the procedural differences.
If a creditor moves to wind your company up, they are usually serious in their intent to recover the money it is owed and/or put the company out of business. In the past (read our rescue stories), we have managed to stop a winding up petition by proposing a company voluntary arrangement (CVA) and/or seeking an adjournment, however this no longer seems to be the case.
Recent case law indicates that there is a possibility that ANY payments from the company after a petition has been served will be voided in the event of a liquidation. This means that legal advice, accountants advice, even wages, cannot be paid without a validation order. This will in effect stop the company from trading. See this page for details.
Therefore it is vital to take action as soon as possible! There may still be time for a company voluntary arrangement if you act quickly - it could save your business.
Generally a winding up petition (WUP) costs between £400 and £800 to issue, PLUS £1,600 court deposit and a filing fee of £280, so it is a serious step to take. Click on the link for an example of what a winding up petition looks like.
Process of issuing a winding up petition: Typically a creditor asks a solicitor to "wind the debtor company up" to recover debts, or to stop the company making its debts worse. This can be any creditor with debts over £750.
An application is made to the high court (PETITION) to ask the court to wind the company up. The process is a very legal and technical one but the main thing to remember is you must act as directors when a threat of a petition is received. YOU MUST ACT quickly or you could face possible personal liability for the debts.
Important Notice! In May 2018, 412 petitions were advertised. Don't let this happen to your company. So call us now on 0800 9700539. If the matter is really urgent, call a director on 07833 240747 or email our advisors on firstname.lastname@example.org.
Request our free 40-page expert guide for worried directors and have all the information you need to know about winding up petitions, legal issues and rescue options.
What options do I have if our business receives a winding up petition? What should I do?
Once your company receives a petition there are now fewer options available;
It is almost impossible to put the company into creditors voluntary liquidation.
- You CANNOT sell the company or the assets, as this sale may be reversed by the Court
- 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. There may still be time to propose a Company Voluntary Arrangement if you act FAST.... Other options include taking legal advice on defending the petition. For instance if the debt is not an agreed. But remember lawyers may not allow the company to make the payment as any payments might be voided in liquidation.
If the business IS VIABLE and has a good future, then administration is a very powerful means to defend your company against the petition.
But 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 may propose a Company Voluntary Arrangement to protect the business and allow a repayment of debts for up to 5 years. Alternatively, it may be sold to a new company or buyers (including you as directors). See the administration guide pages here.
If the business pays the debt, remember it 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, or not owe the debt claimed?
If the action is clearly unfair or an "abuse of court process" then you MUST take legal advice immediately. Ali Akram of LexLaw has written a good piece on his blog about using a winding up petition as a debt collection tactic being an abuse of process.
He points out that an unregulated debt collector used the winding up petition process to extract payments without really understanding enough about the procedure.
Examples of wrong doing include the following;
- Not allowing enough time for the debtor to pay the amounts due
- Not giving sufficient warning of legal action
- Threatening to publicize the petition which is not in accordance with the regulations i.e. sending a copy to your bank.
- Adding unreasonable costs to the application to put on further pressure.
Read the whole article here;
You may be able to legally prevent the petition from being advertised and indeed have it rescinded if it is considered an "abuse". We can provide advice on this and our legal partners can assist you rapidly to STOP the Gazette advert by seeking, in rare cases, an injunction to restrain advertisement or by way of formal negotiation with the petitioner as appropriate. 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, in order to do this you will need 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 prices start at just £495. Call us on 08009700539.
What is a petition advertisement?
The creditor must allow 7 clear days after the serving of the petition on your registered office, before the petition can be advertised in the London Gazette. It must be advertised 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 ‘piggy-back’ on to the same petition and make a claim for their own debt, serving a notice of support on the original petitioner.
It is possible to stop the advert if you act fast. Bear in mind, even if your company pays the debt and the advertisement is stopped, the case can still be heard at court and made public. That's why it's so important to take action before a winding up petition is issued!
Past case study - winding up petition
Directors of a media company came to us, after it had been served a winding up petition. They did not realise the significance of the advertisement of the petition being a public event and within 24 hours their bank account was frozen and so they could not trade. In conjunction with our lawyers, we had to seek a validation order to unfreeze the bank account. In order to do this we had to produce, very quickly, a draft CVA along with forecasts. The order was granted and the petitioners were persuaded to support the CVA and withdraw the petition. The company has now entered a CVA with a return of 55p in the £1 to creditors whereas the expected recovery in liquidation was less than
What happens after the winding up petition is advertised?
At this stage the bank will find out and they will generally 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. Actually it is not legally necessary for the bank to freeze the bank account, but most banks tend to do this. Important Note: Recently the banks have been employing agents to search the court register for companies that have had winding up petitions. This means that they can find out BEFORE the petition is advertised! Either way if you receive a petition you must ACT.
Freezing of Company Bank Accounts and Assets
Why do bank's 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, any transfer of shares made after the commencement of the winding-up is void, unless otherwise ordered by the court. This means that it is very difficult 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.
A 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 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 to ensure 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 (see guide by clicking link) they may recommend that the directors are banned from all current and future directorships for a period of time up to 15 years; However this is quite rare
Directors potential personal liability for company debts
If company directors are found guilty of continuing to allow a business to trade while they KNEW it was insolvent, they may become personally liable for the debts incurred by the company from the time they knew the business was insolvent.
Paying the debt and then obtaining a "Validation Order" is generally the only way to get a new account opened and have the assets released by the bank. We can advise on this process but it requires an application to court and obviously not insubstantial legal fees. If you need advice on a validation order contact us. We have a very aggressive law firm ready to help your company.
If the petition is advertised and the company does not pay the debt, this will generally lead to the Official Receiver (OR) or a court appointed liquidator taking over to wind the company up. If the company has assets then an insolvency practitioner may be appointed by the OR.
How do I protect myself from personal liability if the company is wound up?
Read our guides for wrongful trading here. Director's disqualification here and compulsory liquidation here.
Make sure that all board and management actions have been carefully noted and the assets of the business have not been disposed of. DO THIS FROM AN EARLY STAGE OF INSOLVENCY.
Make sure all management accounts, company books and records and bank statements are available and protected. Act sensibly and promptly. Don't leave it too late to get help, the sooner you act, the more KSA Group can do to help your company.
Stopping a winding up petition
More details on the winding up order process
- How does HMRC collect its debts?
HMRC is what is called a “sophisticated creditor” in that they know all the best...
- How To Stop a Winding Up Petition On My Company
You can prevent a winding up petition being served on your business if you act...
- Winding up petition in Scotland
We are a Scottish registered company and a creditor has threatened a winding up...
- Who is the official receiver?
The Official Receiver is a civil servant in The Insolvency Service and an...
- What is the difference between Voluntary Liquidation and Compulsory Liquidation
It’s important to understand the difference between compulsory and voluntary...