How does the winding up petition process work?

Pile of billsWhat happens when your company is issued with a winding up petition? Keith Steven offers a timeline of events.

What is a winding up petition?

A winding up petition (WUP) is a legal action taken by a creditor or creditors against a company that owes them money (although others can also petition).

If the company owes £750 or more, the creditor can issue a petition in court. The petition will have a hearing date endorsed on it and then must be served at the registered office of the company. It will then be advertised in The Gazette, after a period.

If the order is made, the creditor can seek to appoint an insolvency practitioner as liquidator.

This is an expensive option for creditors, and is considered to be a last resort, so it is only used when all other approaches to retrieve the debt have failed. The courts do not look on it as a debt recovery process, rather that the company can't pay its debts and should be wound up so that liquidation (a collective process) can be used to collect in the company’s assets and distribute them amongst creditors pari passu, after secured creditors and costs.

WUPs are advertised in The Gazette as public notices. They are very serious legal actions and can lead to the company’s bank accounts being frozen. Once the WUP is public knowledge, suppliers and lenders may want to cease supply, further exacerbating the company’s problems. The petition can’t be publicised before the Insolvency Rules allow.                           

What is the process?

Essentially, the WUP is issued, served, advertised seven working days later in The Gazette, and is then heard at court, where it is either dismissed or approved. Once advertised, other creditors may support the petition, and if the original petitioner is paid, or seeks to withdraw, may take over the petition.

If the petition is approved, the winding up order is made. The company will be served the order and the official receiver automatically becomes the liquidator. If a private liquidator is appointed, 50 per cent of creditors in value can ask for this, or 10 per cent of them can request a creditors’ meeting.

WUPs do not usually come out of the blue, and as a director, you may already know that it is coming. You are probably aware of any debt problems and may have spotted the warning signs from creditors. They could have even threatened the company with legal action already.

Below is a brief timeline of events:

Day 1: Once the petition arrives at the registered company’s address, the company can pay or oppose the petition. If the company has a bona fide dispute in respect of the debt, and can show this, the court will not make the order (but the company may need to seek an injunction to restrain advertisement). The company should, if it hasn’t already, seek urgent advice from a solicitor and/or licensed insolvency practitioner. The company could seek to go into creditors’ voluntary liquidation, or look at administration or a company voluntary arrangement.

Day 9: If the company is unable to put a hold on proceedings, the petition is advertised publicly in The Gazette, not less than seven business days after service, and not less than seven business days before the hearing.

Advertising in The Gazette

The main reason that the petition is advertised is for other creditors to see that the company is insolvent. They may then ‘piggy-back’ on to the same petition and make a claim for their own debt, serving a notice of support on the original petitioner. If there was no advertisement, the court would not grant a winding up order.

The advertisement itself is a public document, detailing the name of the company and its registered address, details of the creditor submitting the petition, as well as the address and the date of the future WUP hearing. There is also a mention of the appointed solicitor or insolvency practitioner and their address.

What happens next?

Once the bank sees this petition, they usually freeze the company’s bank account, which effectively puts a stop to all trading. The banks tend to freeze the account. as any movement of money in or out of the account could be reversed by the court, as it could indicate a movement, or rather, 'dispossession' of assets.

It may be possible to apply for a validation order by the court (under section 127 of the Insolvency Act 1986) to ‘unfreeze’ the bank accounts. However, the court would need a substantial amount of evidence and information to assess the situation before allowing this to happen. Again, seek legal advice before looking at this option.

If the company does not respond or appeal during the seven days, the WUP will almost certainly be approved at court and they will issue the order to wind up the company, and the business and assets will be realised by the official receiver or an appointed liquidator. This process is also known as compulsory liquidation.

How can it affect the director(s)?

Once the order is granted, the liquidator (insolvency practitioner or official receiver) will investigate the company and its directors to ensure that the company’s situation wasn’t a result of fraudulent trading, or wrongdoing on the directors’ part. They will look at transactions over the last two to five years, to see if they need to be undone. If there is any evidence of wrongdoing, this will be reported to the Insolvency Service and could lead to a fine and/or director disqualification and compensation order. The directors could also be made personally liable for any debt if a court decides that they acted wrongfully in some way (eg in breach of Companies Act duties, or by paying one creditor in preference to another).

About the author

Keith Steven of KSA Group Ltd has been rescuing and turning around companies since 1994. He has worked for insolvency firms, turnaround funds and venture capital investors. For more information, see Company Rescue.

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