A Winding-Up Petition is a legal action taken by one or more creditors against a company that owes them money (currently over £750). If it can be established that the company cannot pay its debts, the Court may on the presentation to Court of a Winding-Up Petition from the creditor(s), order at the winding-up hearing that the company is placed into compulsory liquidation, marking the death of the company. The presentation of a Winding-Up Petition is by far one of the most potent weapons in the armoury of a creditor. So what happens when a creditor goes nuclear and presents a Winding-Up Petition against your company? Sukhbir Mall, one of our Insolvency and Commercial Litigation Solicitors explains.
What should the company and its directors do?
The debtor company and its Directors are likely to have received advance warning of this step being taken, usually because a Statutory Demand is served on the company/its Directors (demanding payment within a prescribed time) or there is a written threat of this next step being taken:
‘pay by 4.00 pm on [DATE] or else a Winding-Up Petition will be presented to the Court’.
There is much the company and its Directors can and should be doing at this crucial stage, and taking early advice from insolvency and commercial litigation solicitors is one of them.
Having recovered from the initial shock of being served with a Winding-Up Petition the potential immediate consequences for the company and its Directors include:
- Advertisement of the Petition: 7 days after the Winding-Up Petition is served on the company, it can (and should) be advertised by the creditor in the London Gazette. It then becomes a matter of public record, often encouraging a whole raft of creditors to come out of the woodwork supporting the Winding-Up Petition, turning a potentially manageable position into a sure-fire winding-up.
- Freezing of company Bank accounts: Advertisement of the Winding-Up Petition may come to the attention of the company’s Bankers. If it does, the company will likely grind to an immediate halt with all payments in and out of the company Bank account being suspended, whilst the Winding-Up Petition remains in existence.
This freezing step is taken by the Bank because section 127 of the Insolvency Act 1986 makes all payments out of the company void, unless ratified by the Court, after the date of presentation of the Winding-Up Petition. One remedy may be for the company to apply to the Court for a Validation Order, in respect of and to enable continued trading. This is not a cheap step for the company to take.
- Reputational damage: Even if the Winding-Up Petition is ultimately dismissed, often the damage with clients and customers has already been done.
- Ultimately, the death of a company that may otherwise have been salvageable, unless the company takes quick and effective steps to stop that happening. The loss of valuable leases, work and contracts may be a direct consequence of that Winding-Up Petition being presented.
- As a practical consequence, the company will be contacted by letter, email and telephone by many unlicensed agencies and operators, who have become aware of the Winding-Up Petition, offering insolvency and restructuring advice. In our experience, most of those self-serving offers should be declined by the company, in favour of seeking credible legal advice, as to options, from experienced Insolvency and Commercial Litigation Solicitors, who will report to the company on all options available and the consequences of them.
Once the Winding-Up order has been made
The Directors will face an anxious wait whilst their conduct is scrutinised by the appointed Liquidator to determine if any financial claims are to be brought by the Liquidator against them personally alleging (for example):
- Misfeasance (i.e. misapplication or misuse of company assets or property).
- Breach of Statutory Duty by the Director(s).
- Overdrawn Directors Loan Account positions, with claims by the Liquidator for repayment.
In addition, the Insolvency Service may decide to launch its own investigation to determine whether Director Disqualification proceedings should be brought against one or more of the Directors of the company (alleging ‘Unfit Conduct’ by the Directors) and/or whether a Criminal Law investigation is needed in relation to the conduct of the Directors.
All is not lost!
The presentation of a Winding-Up Petition does not automatically mean a Winding-Up Order will be made. With the right specialist legal advice and prompt action, much can be done to save the company or at the least, organise the affairs of the company to best advantage for the company and its Directors, in the period before the hearing of the Winding-Up Petition.
Directors under pressure from the threat of presentation of a Winding-Up Petition often make bad decisions that come back to financially haunt them. The key is to get specialist legal advice from an Insolvency and Commercial Litgation solicitor as early as possible, before those decisions are taken.
Some of the options available to the company are as follows:
- Pay the debt due.
If the debt is admitted, then paying the debt immediately can (depending on the stage of the winding-up process) lead to the Winding-Up Petition being withdrawn in as little as 24 hours, on application by the company to the Court. Withdrawal of the Winding-Up Petition eliminates the chances of the Winding-Up Petition being advertised, which can then prevent other creditors from supporting the Winding-Up Petition and from seeking their substitution as Petitioning Creditor. Payment of the Petition debt should be tied to (where possible) the withdrawal of the Winding-Up Petition by order of the Court.
- Negotiate a payment plan with the creditor(s).
If the company is unable to pay the Petition debt immediately, it may be possible to negotiate a withdrawal of the Winding-Up Petition based on payment over time (perhaps with an immediate payment), before the Winding-Up Petition is ever presented to the Court/advertised.
- Dispute the debt/seek an Injunction.
Winding-Up Petitions may only be used by a creditor where the debt is not subject to a legitimate dispute from the company. The Courts will strike-out a Winding-Up Petition (on application by the company) based on a legitimately disputed liability, if that legitimate dispute can be demonstrated to the Court.
If the Petition debt is legitimately disputed, then it is possible for the company to apply to the High Court to obtain an Injunction to prevent the Winding-Up Petition from being presented or, if already presented, to prevent the Winding-Up Petition from being advertised and obtaining its dismissal.
Here at NDP, we have significant experience of such Applications to the Court, where it has not proved possible, in negotiations with the creditor and/or their Solicitors, to resolve matters. This can be an expensive and risky course for the claiming creditor and the company. The loser of the Application will usually be ordered to pay the costs of the successful opponent.
- Resisting the Winding-Up Petition based on a procedural defeat.
If there are procedural defects in the Winding-Up Petition document (or in relation to the winding-up process) then this can also lead to a Winding-Up Petition being dismissed or buy the company valuable time to take other steps, whilst the Petitioning Creditor gets it procedural house in order.
- The company can apply to Court for a Validation Order to enable the company to make payments and keep trading the business until the Court determines whether a Winding-Up Order should be made, at the Petition hearing.
- Implement an alternative insolvency process.
- Company Voluntary Arrangement (‘CVA’) – allowing the company (subject to creditor approval) to manage and pay its debts over an extended period of time, by agreement with its creditors.
- Creditors Voluntary Liquidation – enabling the company Directors and Shareholders to gain some control over the insolvency process by seeking the appointment of a Liquidator of choice, thus retaining some control over the liquidation process.
- The Director can apply for Administration – often to buy the company some breathing space, allowing the Directors to consider its problems and perhaps ultimately moving the business and its assets to a separate company leaving behind (some or all) the unsecured debts of the company.
How can we help?
Here at NDP, our insolvency and commercial litigation solicitors have extensive experience of advising Directors as to the most appropriate company restructuring options.
Some of the above options will inevitably need the assistance and expert advice of a Licensed Insolvency Practitioner (‘LIP’). NDP Team members have over 120 combined years of experience of dealing with LIPs and insolvency work in its widest sense. We work every single day with trusted LIPs and we are well placed to make introductions to match the right LIP to the particular company. Not all LIPs are the same.
The impact and consequences of a Winding-Up Order for a company and for the company’s Directors are all too far reaching and worrying. However, our experienced Solicitors are on hand to try and ensure that the worst does not happen and that best possible outcomes are achieved.
If you have received a Winding-Up Petition or you think one is on the horizon, please get in touch with us straight away for an initial chat about your options on 0121 200 7040 or email Neil Davies on email@example.com or Sukhbir Mall on firstname.lastname@example.org . The first discussion is free of charge, confidential and without obligation.