Understanding Winding Up Petitions: A Comprehensive Guide

If you are a director and you receive a winding up petition – this should be a clear and obvious signal that your business is at immediate financial risk. If you do not or are unable to deal with the petition, then your bank accounts may be frozen. In addition, it may lead to both suppliers and customers losing confidence in the company. This negativity may well spread if you do not deal with it and/or the petition becomes public by way of an advertisement in the London Gazette.

In this article, we will explain, what a winding up petition is, the issues that arise when it is issued and the steps that can be taken by the company. It will also provide details and information as to the areas where it is crucial to obtain advice as early as possible.

The critical takeaway from this article is that if you receive a statutory demand or a winding up petition, the focus of the article, then it is absolute essential that you seek advice as soon as possible.

What Is a Winding Up Petition?
A winding up petition is a document that is filed, by a creditor, with the court and it asks to have a company liquidated on a compulsory basis – with a liquidator being appointed. The most common reason for it to be issued is due to an inability for the company to be able to pay its debts.
It is important to distinguish between the petition, that starts the process, and a winding up order that completes the process:
•    Petition: The legal document that initiates the process. 
•    Order: The court’s decision, made at a hearing, that it is right that the company should indeed be wound up and placed into liquidation.
If a winding up order is granted, control of the company passes to a liquidator, and the directors’ powers effectively end.

Process when a Winding Up Petition is issued
Once a winding up petition is issued and has been served, by the creditor, on the company then the impact on the business is likely to be swift.
The steps that can take control of your business away from you and of which you need to be aware, are as follows:
•    The petition may be advertised in the London Gazette, once the necessary time has passed, which puts the petition into the public sphere. 
•    The advertisement may lead to banks freezing company accounts to protect their interests. 
•    It is also likely that suppliers and customer, who may monitor advertisements in the London Gazette, will learn of the winding up petition. 
For many businesses, a frozen bank account is the first practical impact of the petition. Whilst there are ways of continuing to trade, such as a validation order, it is difficult and expensive. We would recommend that, as soon as you receive a petition, that you seek to obtain early legal advice – so that options can be provided to you as to how best to deal with the process.

The Winding Up Petition Process – the usual steps
While each winding up petition is unique, most of the winding up petitions that are issued in the courts of England & Wales will usually follow a regular pattern:
•    Creditor Issues and Arranges the Service of the Petition
The petition is issued at court. It is then served on the company, usually at its registered office. The petition, when received from the court, will specify the date that the parties must attend the court for the hearing.  The creditor must arrange for the petition to be served on the debtor and arrange for proof of service to be filed with the court.

•    Advertisement in the London Gazette
If the debtor cannot pay the outstanding debt, then the creditor can arrange for the petition to be sent to and advertised in the London Gazette. This is a necessary step within the process, to ensure that you comply with the rules, and a critical step because it makes the company’s financial difficulties visible to the business world – as set out above, it can often lead to your bank account being frozen.

•    Court Hearing
At the hearing, the court will consider the position of both parties and then it will decide how the petition will proceed. There are several outcomes for the court to arrive at: 
o    Order the winding up of the company 
o    Dismiss the creditor’s petition on the basis the requirements have not been dealt with
o    To adjourn the hearing to allow the parties further time to deal with the petition.
o    Provide the parties with directions for the progress of the matter 
If the petition is contested by the debtor company, then the initial hearing will be adjourned to provide time for the parties to come to a resolution.

What do I do when I receive a Winding Up Petition 
If you are a Company or a Company director that has been served with a winding up petition – then you have a number of potential courses of action, depending on the circumstances:
•    Pay the debtor the full outstanding sum 
•    Try and negotiate a settlement agreement 
•    If you dispute the debt – then seek urgent advice on the best way to prevent the advertisement of the petition 
•    If you wish to continue trading then seek advice on making an application for a validation order  
•    If the debt is due and you do not wish to spend the monies on a validation order to maintain trading – then you should immediately seek advice from an insolvency practitioner. 
Again, as we made clear above – if you receive a winding up petition – FIRST AND MOST IMPORTANT ADVICE IS TO SEEK LEGAL ADVICE. IF YOU DO NOTHING THEN THE REPERCUSSIONS CAN BE DISASTROUS FOR YOUR BUSINESS.

Frozen Accounts – Validation Orders
After a petition is presented to the court, it is possible – should the company go onto be wound up – for certain transactions entered by the company after the petition to be challenged. It is for this reason that banks often freeze accounts – once they become aware of the petition. It is possible for the debtor to take steps to avoid this issue by making an application at the court for a validation order. If you are successful and you obtain the court order then this can allow you to continue to trade and to be able to make payments. This can alongside giving the company the chance to succeed, reduce the potential personal liability for directors. 
If you wish to try and obtain a validation order then, given their extremely technical nature, you must seek legal advice as soon as possible.

The London Gazette – how to advertise
The point at which you present the petition to the London Gazette for advertisement is a key milestone.
Once it is done and the London Gazette, with your advert in, is published:
•    The winding up petition will become available to the public 
•    All banks and creditors are likely to see the advert (leading to further issues for debtor) 
•    It may lead to other creditors – indicating an intention to support the petition 
It is very important for the creditors and companies to understand the timing, and the consequences, of the process.

Adjourning, Withdrawing, or Dismissing a Petition
It is true to say the just because a petition is issued it does not necessarily result in a winding up order. 
The possible options for a winding up petition can be:
•    Withdrawn after the debtor has paid the monies owed to the creditor  
•    Adjourned to allow the parties time to arrive at a settlement
•    Dismissed by the court 
The outcomes referred to above are all different have, consequently, different implications. The approach that you will take, or be advised to take, will depend on if you have issued the petition or received the petition.

HMRC and Public Interest Petitions
•    HMRC petitions: These often arise when the company is being targeted for tax enforcement. They are, traditionally, far more difficult to negotiate a settlement on. It is even more essential that you seek early advice where the creditor is HMRC. 
•    Public interest petitions: Issued on public interest grounds, usually, following an investigation by the Insolvency Service. They are different from a standard winding up petition and normally involve director conduct issues. They require a bespoke defence strategy and, as with issues above, seeking early legal advice is essential.

What Happens If a Winding Up Order Is Made?
The outcome of the process if, at the hearing of the petition, the court orders the winding up of the company:
•    It will be put into compulsory liquidation 
•    The Official Receiver (to the location of the company) or an insolvency practitioner will be appointed as liquidator. 
•    Following their appointment - the liquidator will carry out investigations into the directors’ conduct. This can result in personal claims being bought by the liquidator or disqualification claims being bought by the Insolvency Service. 
As we can see, the implications extend beyond the company itself, potentially affecting directors personally.

How Long Does the Winding up Petition Process Take?
If the case is routine, then the process from the petition being issued to the court hearing usually takes in the region of eight to ten weeks – depending on the workload at the court. If the debtor disputes the petition or there are negotiations in relation to the amount claimed, then it can lead to adjournments which will extend the time frame.

Next Steps

If you receive a winding up petition then it is a serious event, however with the right advice as early as possible, it is possible to negotiate through it and save your company. For help and advice you can contact Richard Ludlow on 01732 496 496.