A Winding Up Petition is the most serious action a creditor can take against your company; taking their frustration at lack of payment to the next level by petitioning to liquidate your company as it is unable to meet its liabilities as and when they fall due.
If your company is struggling under the weight of escalating debts and creditors are relentlessly chasing you for payment that the company cannot afford, a Winding Up Petition is an inevitable outcome.
Unless steps are taken to quickly deal with the petition, the petitioning creditor – which in the majority of cases is HMRC – can proceed to advertise the petition which can alert other creditors to its existence and stir them into action too. When your bank becomes aware of the petition, they will take steps to freeze the company’s bank accounts and no further transactions will be possible.
It is therefore imperative that you speak to us as soon as the petition has been received rather than attempt to ‘trade out’ of the problem as once your account is frozen, options available for your company are dramatically reduced.
Once instigated by a creditor, the compulsory liquidation process (winding up) will lead to an appointment by the Court of the Official Receiver (OR) who has considerable powers to investigate the company's affairs and the reasons for its failure.
Occasionally, the OR’s investigations may include scrutinising the actions of an insolvency practitioner who was previously appointed, such as a receiver or administrator of the company.
It is unlikely for a Winding Up Petition to have been served out of the blue; ideally company directors should have identified the potential onset of formal insolvency before the petition was served. In addition, directors will now find themselves in the involuntary position of allowing creditors to force the company into compulsory liquidation instead of taking action themselves to select the most suitable option on their terms. However, there might still be a chance to rescue the company if you act within seven days of receiving the petition.
From the date of the petition the seven-day countdown begins to pay the amount owed or mount a defence. If the funds cannot be raised to pay the debt, the assistance of a licensed insolvency practitioner is required. If you are unable to respond or appeal within seven days, it is highly likely that the Court will approve the petition and grant a Winding Up Order. Once this is granted, the compulsory liquidation process is established and matters are taken out of your hands.
What can be done in those seven days?
• Your appointed insolvency practitioner could propose and negotiate a Company Voluntary Arrangement (CVA). If the business appears to be viable, this offers the creditor a proportion of the debt over a longer period of time, and allows the company breathing space to turn the business around.
• Apply for an adjournment of proceedings so that the Administration route can be considered.
• Voluntarily have the company placed into Administration – this would prevent a Winding Up Order being issued by the courts. Company assets would be valued and sold by an appointed administrator to cover some or all of the debt. Begbies Traynor has vast experience of company insolvency, and can offer timely advice on all such matters. If the business is viable and is likely to be profitable in the future, we may be able to turn things around.
• Pay all monies due to the creditor, perhaps using asset-financing as a way to raise the funds. Bear in mind though, that the total debt will now include the petitioner’s costs.
• Disputing the debt is an option – this is a serious step, however, and should not be taken lightly. This type of accusation against the creditor is called ‘abuse of court process’ and is one that needs solid evidence to back it up.
• An injunction could potentially be taken out to either postpone or prohibit the petition being advertised in the London Gazette. This would prevent other creditors becoming aware of the situation, an important point as the banks keep track of these adverts and would freeze all company accounts.
A company may be issued with a Winding Up Petition if more than £750 is owed to a creditor. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022. It is likely to be a last resort for the creditor, however, as fees charged for issuing a Petition are high. Currently standing at £1,490-£1,990, monies owing are generally higher than these amounts, otherwise the creditor’s action would not be worthwhile.
Timeline for a Winding Up Petition
This is the general timeline of events once a Winding Up Petition has been sent by a creditor:
1. The petition is served at the company’s registered address, and a date set for the hearing.
2. From this point, company directors have exactly one week in which to act, otherwise the petition will be advertised in the London Gazette, alerting banks to the situation. The bank will then freeze the company account to prevent the disposal of assets, effectively stopping all trading.
3. If the week passes without change, the court will issue a Winding Up Order, the company will be liquidated and the directors will have no further influence on proceedings.
4. Once a Winding Up Order has been issued, company assets will be valued and sold. The liquidator must also investigate the actions of company directors in relation to how the business was run. In some cases, the directors may face accusations of misconduct if they have continued to trade despite being aware of company insolvency issues. In these instances, directors may become personally liable for company debts incurred from the date they knew about the insolvency.
It is advisable to make sure that all accounting records and other relevant company information is available, whether or not compulsory liquidation occurs. Clear and accurate record-keeping enables the work of the insolvency practitioner to be carried out quickly and efficiently, and in the case of a Winding Up Petition, speed is of the essence.
If company directors are found guilty of misconduct, the result can be fines and/or disqualification from being a limited company director in the UK - this ban can last for up to fifteen years. In serious cases of misconduct, directors could face imprisonment.
So as you can see this is a particularly serious issue, but one that is not entirely reversible. We cannot stress enough, the need to seek professional advice and support from experienced insolvency practitioners in cases such as this.