Does a Winding Up Petition mean the end of the line?
December 1, 2021
Businesses struggling to pay their bills were given unprecedented breathing space during the pandemic, as the government closed off every avenue of attack for frustrated creditors. Now the gloves are gradually starting to come off.
Landlords are still bound hand and foot and will be until at least the end of March 2022, but other creditors can now use the traditional weapon of a Winding Up Petition (WUP) to enforce settlement of the debt they are owed, provided it is more than £10,000 and the debtor company is unable to come up with a satisfactory payment proposal within a 21 day ‘cooling off’ period after being notified that the creditor intends to issue a WUP.
How does the Winding Up Petition process work?
Assuming the debtor company is unable to satisfy the creditor with a proposal during the initial cooling off period, the Winding Up Petition will be issued and served on the debtor. Seven working days after service or at least seven days before the schedules court hearing, the Winding Up Petition is advertised in The Gazette. Thereafter, it will be heard by the court. Once the WUP has been advertised, other creditors can join in to support the petition, and even if the original petitioner is paid or decides to withdraw, may take over the petition.
Assuming no successful defence is mounted, the WUP will be approved and the court will issue a Winding Up order, putting the debtor into Compulsory Liquidation with the Official Receiver acting as Liquidator unless creditors put their own private sector nominee in their place. The Liquidator takes control, realise the company’s assets and distributes the proceeds to the creditors after costs and in accordance with certain priority rules.
How does a Winding Up Petition affect a company?
Once a bank finds out about the issuing of a WUP, it will usually freeze the debtor company’s bank accounts, which effectively puts a stop to all trading. The banks do this because any movement of money in or out of the account could be reversed by the court, on the basis that it is an invalid transaction under insolvency legislation.
It may be possible to apply for what is called a validation order to be made by the court to unfreeze the bank accounts. However, the court will require a substantial amount of evidence and information to assess the situation before allowing this to happen.
The basic purpose of advertising the WUP is to warn other creditors that the company is insolvent and may soon go into Liquidation. Quite apart from the risk that they join in the WUP to support the petitioning creditor, they are likely to withdraw credit facilities and demand payment up front for further supplies or services, or even refuse to do business with the company at all.
What potential pitfalls does a WUP bring for Directors?
Once the winding up order has been granted, the Liquidator is duty bound to investigate the company and its Directors to satisfy themselves that the company’s failure was not the result of wrongful or fraudulent trading, or some other misdeeds on the part of the Directors.
They will review past transactions over the last two to five years, with the intention of reversing them or initiating action against the Directors through the Insolvency Service if there appears to be evidence of wrongdoing. This can lead to a fine or the disqualification of the Directors, who may also be ordered to contribute towards the losses suffered by creditors if a court decides that they have acted wrongfully in some way, for example in breach of Companies Act duties or by paying one creditor in preference to others.
Can you stop a WUP?
The obvious way to halt the winding up is to pay the debt, but assuming this is not a practical cash flow option or the debtor does not accept the creditor’s claim, it is possible to have a WUP set aside on a number of different grounds.
The most common is that the debt may be genuinely subject to a dispute. Alternatively, it could have a procedural defect, such as a mistake in the documentation. It may not have been served on the debtor company properly or it may have been advertised incorrectly. Finally, the WUP may be an abuse of process and being used to bully a debtor into payment. In those circumstances, the petition can be dismissed by way of an application to the court.
What if the debt is genuine but cannot be paid?
In these circumstances, the debtor company can decide to go down alternative and more positive insolvency routes. The options include going into Administration, proposing a Company Voluntary Arrangement (CVA) to its creditors or going into Voluntary Liquidation (CVL). The first two offer the additional potential upsides of rescuing the business and saving jobs.
In many cases, all of the options are highly likely to produce a better outcome for creditors than the Compulsory Liquidation following the WUP. This will be of particular interest where Directors have given Personal Guarantees of their company’s liabilities, for example to a lender or a landlord.
Taking professional advice – and taking it early
A Winding Up Petition is not usually a surprise to Directors, who should be aware of any debt problems building up beyond normal collection procedures and have noticed indications from creditors that they are losing patience. They may have issued a Statutory Demand as a precursor to the WUP or have threatened the company with legal action in more general terms. These are not scenarios where the threat will go away if doing nothing is done.
It is vital to take expert professional advice at the earliest moment and not just legal advice on potential defences against the WUP. One important task will be to put together a credible settlement proposal that will be irrefutably acceptable to the creditor (and where appropriate, the court) under the new 21-day cooling off procedure. This is likely to mean preparing comprehensive data on the company’s financial position and a clear explanation of its implication for the creditors, which is a specialist skill.
It is also important to discuss with an insolvency expert what other options are available when a debt cannot be settled or disputed, such as putting the company into Administration, proposing a CVA to creditors or accepting that Liquidation is inevitable, but choosing the more beneficial route of a CVL.
If you believe your business is already affected by these issues or believe you might be, and you would like to arrange an initial meeting to discuss the best way forward, contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.
If you have a question for one of our specialists, please use the form below and a member of the team will be in contact shortly.