A winding-up petition is a serious legal process that can have a profound impact on businesses and their stakeholders. To fully appreciate the implications of a winding up petition, it’s helpful to understand the legal framework and procedures that govern the process.
This article aims to demystify winding-up petitions to give the reader a comprehensive understanding of this critical legal procedure.
What is a Winding Up Petition?
A winding-up petition is an application to court, made by a creditor (i.e. a company or individual who is owed money by the company in question), seeking to force the compulsory liquidation of a company which has failed to repay a debt.
It is generally a last resort for creditors to recover monies owed to them. If the petition is successful a winding-up order is granted by the court and a liquidator takes over the company so that its assets can be sold and distributed amongst creditors.
His Majesty’s Revenue and Customs (HMRC) – the UK’s tax authority – issues more winding-up petitions than any other organisation. Typically HMRC might file a winding-up petition against a company that has failed to meet its tax obligations, such as non-payment of corporation tax, VAT, or PAYE, although it would only tend to do so after it had exhausted other routes to collect the debt.
Although HMRC is the most common petitioner any company, organisation or individual can issue a winding-up petition in relation to an outstanding debt.
Process of a Winding-Up Petition
The process for a winding-up petition involves filing the petition with the court, providing evidence of the debt owed, serving the petition to the debtor company, advertising the petition in the appropriate gazette, attending a hearing where the court reviews the case, granting a winding-up order if the company is insolvent, commencing the liquidation process to realize assets, distribute funds to creditors in order of priority, investigate the company’s financial affairs, and ultimately dissolve the company.
Filing the Petition
A creditor can file a winding-up petition if a company owes them £750 or more. The creditor must provide evidence that the money is owed, which would generally be in the form of a statutory demand which has been unpaid for 21 days since being served on the company, or a court judgement showing that the debt is due.
The creditor submits the winding-up petition to the court, along with a statement of truth and a court fee (around £300 as of June 2023).
Service of the Petition
Once the court has reviewed and issued the winding up petition, it must be ‘served’ on the debtor company at its registered office address. The debtor company then has seven days to respond to the petition.
Advertisement of the Petition
Assuming the company is based in England or Wales, the petitioner must advertise the winding up petition in The London Gazette – one of the UK’s official journals of record – no earlier than seven days after the petition has been served and no later than seven days before the hearing date.
This advertisement informs other creditors and interested parties of the petition, enabling them to join the proceedings if they wish. If the company is based in Scotland or Northern Ireland, the Edinburgh or Belfast Gazettes must be used.
Hearing and Court Decision
On the scheduled hearing date, the court will review the winding up petition and any supporting evidence, as well as hear arguments from both parties. If the court is satisfied that the debtor company is insolvent and unable to repay its debts, it will grant the winding-up order.
Liquidation Process
Once the winding-up order is granted, the liquidation process commences. In most cases, The Official Receiver, a government official, will act as liquidator, to begin with. The Official Receiver may then ask creditors to choose a licensed insolvency practitioner to become a liquidator.
The liquidator’s primary tasks include:
Realising the Company’s Assets
This means collecting monies owed and selling physical assets. Generally, a liquidator will instruct a specialist valuation agent to sell the assets on their behalf – the agent will either seek to find buyers for individual assets or sell them at auction.
Distributing the proceeds to the creditors in accordance with the prescribed order of priority. This is a complex area but, broadly, the order in which creditors are repaid is as follows:
- Creditors with fixed charges (typically a mortgage or assignment of receivables)
- Preferential creditors (employees owed wages and holiday pay, followed by most HMRC taxes)
- Other shareholders, such as a bank with a “floating charge” (generally a debenture)
- Unsecured creditors (generally trade creditors, employee redundancy and notice pay and some HMRC debts).
- If there are any remaining funds, they are distributed among the company’s shareholders (this is extremely rare in compulsory liquidation).
Investigating the company’s financial affairs, as well as the conduct of its directors. The liquidator has wide powers to try to overturn transactions occurring prior to the liquidation, which may have been prejudicial to the company’s creditors, such as if certain creditors received repayment in full but others were not paid or if assets were transferred out of the company for less than they were worth.
Dissolution of the company
Once all assets have been liquidated, and the funds have been distributed among the creditors, the liquidator will apply to have the company struck off the register. The company will then be dissolved, ceasing to exist as a legal entity.
Consequences of a Winding Up Petition
A winding-up petition has severe consequences for the debtor company and its stakeholders, including:
- Freezing of the company’s bank accounts upon advertisement of the petition, which can cripple its ability to continue trading
- Damage to the company’s reputation, making it very difficult to secure future credit or investment
And if a winding up order is made the impact is terminal, resulting in:
- Loss of control over the company’s assets and affairs, as the liquidator takes charge of the liquidation process
- Termination of the company’s contracts, leases, and other agreements
- Unemployment for the company’s employees as the company ceases trading potential personal liability for the company’s directors if they are found to have engaged in wrongful trading or other misconduct
Alternatives to a Winding-Up Petition
If a company is facing financial difficulties, it is crucial to explore alternative solutions before a creditor issues a winding-up petition. Some possible alternatives include:
- Negotiating a payment plan with creditors
- Refinancing or restructuring the company’s debts
- Seeking additional investment or working capital
- Implementing cost-cutting measures to improve the company’s cash flow
- Entering into a Company Voluntary Arrangement (CVA) to restructure the company’s debts and continue trading under a revised payment plan
Summary
Receiving a winding-up petition is an extremely serious event that can have far-reaching, often terminal consequences for the debtor company, its directors, employees, and creditors.
It is essential for businesses to understand the implications of a winding up petition and to react immediately if one is received – even a few days’ delays could be the difference between survival and closure.
We recommend you speak to an Insolvency Practitioner immediately: they will be able to advise you on your options and help you to navigate what can be an extremely challenging scenario.
