Understanding winding up petitions: the process and common pitfalls

Following our article on statutory demands (“SD”), if a company has received a SD and has failed to raise a legitimate dispute or make payment, then the creditor can proceed with a winding up petition. Winding up petitions play a crucial role in the legal landscape, particularly in the context of debt recovery and business insolvency. In this article, insolvency litigation solicitor Matthew Hennessy-Gibbs and disputes partner Ben Crowley provide an overview of winding up petitions, including clarification on their purpose, the process, and the potential implications for businesses facing such petitions.

What is a winding up petition?

A winding up petition is a legal document filed by a creditor, typically seeking to force a company into compulsory liquidation. This occurs when a business is unable to meet its financial obligations or pay its debts when they fall due, and the creditor believes that liquidation is the only viable solution to recover outstanding debts.

The process

1. Issuing the petition

• A creditor issues the petition at court and serves a winding up petition to the debtor company, usually at its registered office. Is service valid, when was it served, on whom and where? The issue of service can be complex and can disrupt the process if not undertaken properly and in accordance with the rules and case law.
• The petition must detail the debt owed, not just state the figure, and it is usually issued after other attempts to recover the debt have failed such as the service of a demand letter of SD. Does the petition you are issuing or have received comply, is it in the correct currency, can you issue in a different currency to GBP? Is there a dispute, is that dispute legitimate? Is all of the debt disputed or part? These are some of the common questions that arise and must be resolved, and failure to do so may lead to an adverse costs order by the court.

2. Advertise the petition

• The petition is then advertised in the Gazette, making the public, financial institutions and other creditors aware of the legal action. Some creditors will advertise early and some at the last possible time in accordance with the rules. Has the petition been advertised properly, and has sufficient time been given in advance of the hearing date?
• In many instances a debtor will attempt to settle the petition, often before it is advertised, as the consequences of advertising can significantly affect a company’s cashflow and ability to raise funds.

3. Court hearing

• A court hearing is scheduled approximately six weeks after issue of the petition, giving the debtor an opportunity to raise a legitimate dispute in respect the petition or settle the debt before the court issues a winding up order.
• Before the hearing there is an important timetable to follow with required actions which must be taken to ensure that the required process has been complied with. Again, failure to comply can lead to delay, a loss of momentum in collecting the debt and possible adverse costs orders. Proper preparation before the hearing is therefore crucial.

4. Winding up order

• If the court is satisfied that the debt is valid and the company is insolvent (unable to pay its debts as they fall due), it may issue a winding up order. This leads to the compulsory liquidation of the company.

Implications for businesses

Compulsory liquidation

• The primary consequence of a winding up order is that the company is forced into compulsory liquidation and a liquidator is appointed to realise the company’s assets with the proceeds used to repay creditors. Some creditors will ensure that their preferred liquidator is appointed to ensure maximum realisation and to fully investigate the affairs of the company.

Director disqualification and personal liability of directors

• Directors of the insolvent company may face disqualification from serving as directors in other companies for a specified period if their actions are deemed to be the cause of the liquidation. Directors therefore need to be fully aware of their duties both when a company is solvent and insolvent and be in a position to best protect themselves should a liquidator begin investigating a director’s actions and conduct.
• In some instances, directors may be personally liable for company debts if, for example, they are found guilty of wrongful or fraudulent trading.

Impact on credit rating

• The liquidation process and its aftermath can severely impact the credit rating of both the company and its directors.

Winding up petitions serve as a last resort for creditors seeking to recover outstanding debts from insolvent companies ordinarily because there is a belief that the creditor will only get paid pennies in the pound following any liquidation. However, that is not always the case.

Understanding the implications of petitions is essential for companies, creditors and directors as they navigate the complexities of insolvency and insolvency proceedings. As with any legal matter, seeking professional advice is essential to understanding the intricacies of winding up petitions and explore alternative solutions before reaching the point of compulsory liquidation.

If you are a creditor or a debtor and need advice on the next steps you should take if you have been served or threatened with a petition or if you want to issue one, please contact Matthew Hennessy-Gibbs and Ben Crowley.