What is the winding up procedure in Scotland? And how has the coronavirus pandemic affected it? Lucy McCann and Christina Barr of Brodies LLP explain how the winding up petition process works in Scotland.

What is a winding up petition in Scotland?

Winding up a company (liquidation) occurs when a company is unable to pay its debts. A winding up petition is a legal action taken by company directors, creditors or contributories against a company that owes them money, or by the company's directors themselves. This can be found in sections 122, 123 and 124 of the Insolvency Act 1986.

A company is deemed unable to pay its debts in Scotland if:

• it owes more than £750 to a creditor and a written demand has been served requiring payment to be made within three weeks but the company has failed to do so (this is commonly referred to as a ‘statutory demand’)
• the ‘induciae’ (the time limit given) of a charge for payment on an extract decree has expired without payment being made
• it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due or if the value of the company’s assets is proven to be less than the amount of its liabilities

What is the court winding up procedure in Scotland?

In Scotland, winding up petitions can be presented to the Court of Session in Edinburgh or, if the share capital is less than £120,000, to the local Sheriff Court in which the company's registered office is located. 

Once the court has considered the petition and is satisfied that the company is unable to pay its debts as they fall due, first orders for service and advertisement will be issued. The petition is then served on the company (usually by recorded delivery post at the company's registered office) and advertised in The Gazette. 

Once the petition has been served, the company (or any other interested party) has a period of eight days to lodge answers. If answers are lodged, a hearing will be fixed by the court to determine whether the winding up petition should be granted. However, if no answers are lodged and payment of the debt is not made, the petitioner will return the papers to the court and ask for the winding up order to be made and for the ‘interim liquidator’ to be appointed. The matter will not call in court.

In Scotland, there is no official receiver, and instead an insolvency practitioner will be appointed to act as interim liquidator. The interim liquidator’s appointment is effective on the granting of the court order and directors will no longer be responsible for the running or management of the company.

If a company has lodged a caveat with the relevant court, this will be triggered on the lodging of any petition, which means that the court will give advance notice before granting an interim (immediate) court order.

How is an interim liquidator appointed?

An interim liquidator is appointed by the court, but their appointment must be approved by majority at a creditors' meeting, otherwise an application to court is needed.

Once all assets have been identified and distributed, as a terminal procedure, exit from liquidation is completed via dissolution and strike off. There is no set period prescribed for the term of a liquidator's appointment, so it can run for years.

Once a company enters into liquidation, there is no mechanism in the 1986 Act which allows the order to be recalled. As a result, the company will always be in liquidation. 

What is a provisional liquidator?

Depending on the nature of business of the company being wound up, appointing a ‘provisional liquidator’ might be considered – but only in a small amount of circumstances. Provisional liquidators are granted specific powers by the court, which include being able to trade and buy and sell on behalf of the company. When seeking the appointment of a provisional liquidator it is good practice to set out the specific powers needed by the provisional liquidator in the petition. 

The role of a provisional liquidator is to safeguard the business and assets of the company, pending the decision of the court as to whether it is appropriate to wind up the company. For a provisional liquidator to be appointed, the court will have to be persuaded that this will benefit the general body of creditors.

How can you prevent a winding up petition being lodged?

If a caveat has been lodged, the court will fix a hearing at which the affected company can address the court, before any order is granted for service or advertisement. While a caveat is not a guarantee against the petition being served or advertised, it does provide the chance to settle the debt before the petition is advertised. 

How has coronavirus (COVID-19) affected winding up petitions?

Coronavirus (COVID-19) has impacted on the way in which winding up petitions are currently used. In fact, in a sense, it would be fair to say that the UK government has ‘furloughed’ the procedure to provide some breathing space to struggling companies.

The Corporate Governance and Insolvency Act 2020 came into force on 25 June 2020 and contains provisions that significantly limit a creditor's ability to wind up a company. The Act stops a winding up petition from being presented to court on the basis of a statutory demand, where that demand was served between 1 March 2020 and 30 September 2020 – known as the ‘relevant period’.

It also restricts a creditor from presenting a winding up petition during the relevant period unless a creditor has reasonable grounds for believing that either:

• coronavirus has not had a financial effect on the company
• the situation that the company is in would have happened even if coronavirus had not had a financial effect on the company

So far, all creditor challenges to these restrictions have failed. However, the restrictions described above should only be in place until 30 September 2020 but given the enormous impact that the pandemic is having on all aspects of life, it is possible that this date may be extended.

If that happens, it is likely that we will see more petitions brought by creditors and further challenges to the restrictions being taken, or arguments that a company's financial difficulties have not been caused by coronavirus. 

How can I find out if a winding up petition has been issued?

As the UK’s official public record, The Gazette publishes wind up petitions as part of the legal process. A petition is advertised publicly, not less than seven business days after service and not less than seven business days before the hearing.

Each notice will contain information about 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 winding up petition hearing. There is also a mention of the appointed solicitor or insolvency practitioner and their address.

About the author

Lucy McCann is a partner and Christina Barr is a senior solicitor in insolvency at Brodies LLP.

See also

What you need to know about Corporate Insolvency and Governance Bill

Can a winding up petition be stopped in Scotland?

What are your employee rights when your company is insolvent?

Find out more

Insolvency Act 1986 (Legislation)

Corporate Governance and Insolvency Act 2020 (Legislation)

Image: Getty Images

Publication date: 21 July 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.