Winding up petitions are sometimes also known as compulsory liquidation. In this guide, we explore why a winding up petition would be issued by creditors and what the process behind it is.
NOTE: Current restrictions arising from the Corporate Insolvency and Governance Act 2020 due to the Covid-19 pandemic currently prevent winding up petitions from being presented based on statutory demands that were served between 1st March 2020 until 31st March 2021 unless you can prove the pandemic has not affected the ability to pay the debt or the debt issue would have occurred regardless.
- What is a winding up petition?
- How long does a winding up petition take?
- Who can issue a winding up petition?
- Why would a winding up petition be accepted and what are the other options?
- Why would a creditor issue a winding up petition?
- Apply for a winding up petition
- Court hearing
- Why could a winding up petition be dismissed?
- After the hearing
- Who gets paid?
What is a winding up petition?
A winding up petition is the last resort option for creditors to try and claim some of the money they’re owed for debts above £750. Should you be successful in your application the debtor company will be brought to an end on the grounds that they’re unable to pay their debts.
The company is then liquidated meaning any assets the company have are sold and any money owed to them is collected. They are also required to settle any legal disputes and once all this is resolved debts are paid out to any creditors.
How long does a winding up petition take?
There is no fixed time but a guide of 8-10 weeks is a good approximation as to the length of the procedure from the initial search of the petition register to the hearing.
Who can issue a winding up petition?
In order for a company to be wound up the debt owed to you must exceed £750 and you must be able to prove that they are unable to pay the debt. Normally this is following a statutory demand or county court judgement (CCJ).
Any creditor can issue a winding up petition as well as HMRC. Once other creditors are aware of the petition they can join or support once the relevant documentation has been presented.
Why wouldn’t a winding up petition be accepted and what are the other options?
Before the presentation of the winding up petition, it is wise to consider all other options as the court will want to see evidence that these options have been exhausted prior to accepting the petition.
A variety of alternatives may be available and this should only really be considered once if it really is the only option remaining. There several reasons why the court may reject the application and it is recommended that litigation or an alternative dispute resolution be considered first. An injunction may be appropriate if you fear that assets may be at risk of dissipation.
You will need to check if an insolvency procedure has already commenced. Failure to do so could leave you at risk of paying costs. If a petition has already been presented it may be appropriate to support the petition or if that doesn’t proceed you can attempt to substitute yourself as a new petitioner.
If a company has been dissolved prior to the petition you will need to seek an order to restore the debtor to the company register. The court has the power to backdate a petition where normally it would have been time-barred.
If there is a debt that has a genuine dispute or the company has a genuine right to set-off or cross-claim then there is a high risk of the petition failing. In these circumstances, the debtor may successfully apply for an injunction restraining the presentation of the petition in which case you may be liable for costs.
In the first instance, you should seek to recover the debts informally. If that fails you can formalise the process with a statutory demand. We talked about this process in our insight article on the matter. A statutory demand is written notice and allows the debtor to pay before the situation escalates.
There are 21 days for an agreement to be reached with the creditor either by agreeing on a payment structure or settling the debt. Failure to do so would give strong grounds to apply for a winding up petition as it shows they are unable to pay their debts so if you do intend on seeking a winding up petition this would be the logical first step. Other alternatives include:
County Court Summons
If the debtor refuses to pay a debt can instead instigate a county court claim. If the debtor does not acknowledge the summons then a default judgement (County Court Judgement – CCJ) may be granted or it if is challenged it may proceed to trial. In the case of a CCJ, this is something that will cause difficulties for the debtor in gaining credit for a minimum of 6 years whilst it is on the records.
Notice of Enforcement
Another option is to request a Notice of Enforcement from the court. This is a formal document which informs a debtor you are about to take action to recover the debt. Through the use of bailiffs, it gives the creditor the power to claim the company’s goods to raise funds at auction. A noteworthy point is that HMRC can use this process without having to go through the courts.
Controlled Goods Agreement
This process identifies goods that could be seized to raise funds to reduce the debt. A controlled goods agreement requires the debtor to sign and would grant them seven days to pay off the debt or the named goods will be seized. This is a legally binding document and they are not able to remove the named goods. If they do not sign the agreement the goods can be seized immediately.
Why would a creditor issue a winding up petition?
As described a winding up petition should be considered a last resort after a creditor has visited all other options. Generally speaking, the reason to choose to go down this route is that there is no feasible way for the debtor to pay the money owed. Alternatively, it may doubt that the company is being run honestly so will want to initiate an investigation by insolvency practitioners.
Apply for a winding up petition
Fees and deposit
In order to submit an application for a winding up petition the following payments need to be paid:
- Court fee – £280
- Receivers deposit – £1,600
This is the payment made for the winding up process to be managed by an Official Receiver
- Search Fee – £11
It is possible that you may not have to pay this fee if you have carried out a search of your own before presenting the petition
To apply you will need to fill in form Comp 1 and submit it to the appropriate court and the debtor company. However, as any mistakes in the process could result in the application being rejected and/or additional costs we strongly recommend seeking legal advice.
You will need to include details such as the contacts of the registered company and information about the debt as well as evidence that the company owes you money. For example, this could be that you have served a statutory demand or a court judgement that is still unpaid. Form Comp 2 is also required which sets out additional details.
After the application
You’ll receive a copy of the petition which you’ll need to serve to a company director or employee of the debtor company. You will need to use a Process Server (an individual who will carry out this process for you) as there are rules that must be followed to legally deliver the documents.
You will also be required to provide a certificate of service to the court confirming that you have successfully served the petition on the company.
Once the petition has been accepted by the court you will receive confirmation of the hearing date. The court hearing is where both parties present before a judge where you will attempt to have the company wound and if successful, where the order will be issued.
Announce the hearing
You are required to formally announce the hearing which must include details of the date and time plus the details of which court the hearing will be held in. This is done in the following steps:
- Advertise the hearing in The Gazette a minimum of 7 working days in advance of the hearing confirming that the petition has been served. Publication must be done in a specific format and it allows other creditors to come forward.
- You must send a copy of the form Comp 3 a minimum of 5 working days in advance of the hearing which is a certificate of compliance showing that you have advertised in The Gazette.
- Finally, you will need to present an attendance list using form Comp 4 no later than 4.30 pm the day before the hearing.
Once the winding up petition has been seen by the debtor’s bank they will usually freeze accounts to prevent money from being moved out of the company in a process called dispossession.
During the hearing
In the hearing, the creditor will usually request that the debtor be wound-up however either party can ask for an adjournment to attempt to resolve the issue without the collapse of the company. There is also the possibility of requesting dismissal of the petition on the basis that the debt has already been paid (or an agreement has been made). The final option is for the judge to make an interim order before making the final order.
Why could a winding up petition be dismissed?
The simplest reason is that the debt has been paid or an agreement has been made and as such there would be no reason to make the order.
A key point is that the court will ensure that the correct procedure has been followed. Should this not have occurred it is a strong possibility that the winding up petition may be dismissed.
Another reason for dismissal is if the judge believes there may be an ulterior motive. A winding up petition should only be used as a process to recover debt and any misuse will result in it failing.
If the debt is unproven, i.e. there is a dispute over the debt then a judge may choose to dismiss the petition. Alternatively, it may be adjourned until the dispute has been settled.
After the hearing
If the winding up petition is a success then the court will issue the winding up order. This initiates the process of liquidation where an official receiver is put in charge to sell off the assets of the company allowing some of the company’s debts to be paid. At this point, any employees of the company will also be made redundant.
The judge will also make an order regarding the costs for both parties:
- If the petition is successful the court will usually make an order to award costs to the petitioner out of the assets of the company.
- If it is dismissed because the procedure was not correctly followed then costs the petitioner will not be entitled to costs.
- If the petition fails then the petitioner will usually be ordered to pay the debtor company’s costs.
- If the petition is dismissed because the debt is paid or an agreement has been reached then the court will usually order the debtor pays costs however for the petitioner to agree to dismissal then they will normally insist on costs being paid.
Who gets paid?
There is a priority list of who gets paid first as per the Insolvency Act 1986:
- Secured creditors with a fixed charge – lenders such as banks with a charge over company property
- Preferential creditors – Examples include employees who are entitled to wages
- Secured creditors with a floating charge – This means a creditor who holds a charge over the company but not over a specific asset
- Unsecured creditors – Examples include suppliers, customers, HMRC and contractors
- Shareholders – should there be any remaining assets then these will be distributed amongst shareholders of the company
Do you require assistance with a winding up petition that you’d like to discuss with the team? We have offices in London and Hertfordshire and can arrange a call to provide some initial advice.
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