I’ve received a winding up petition, now what?

Getting a winding-up petition relating to your company is extremely worrying, so you need to know what it means, where you stand and what your options are going forward.

A winding up petition is issued by a creditor; it could be one of your suppliers, a contractor you have been using, or quite commonly, Her Majesty’s Revenue and Customs (HMRC). The petition, or the threat of one, is used by the creditor to stop you trading, declare your company insolvent and get themselves paid with any money that still remains.

How does someone issue a winding up petition?

Let’s look at how the creditor goes about this. For a start, it’s not cheap for them to do, so you need to know that they are usually serious if they decide to do it. They have to put down a £1,350 court deposit, a filing fee (£280) and then pay for the actual winding up petition which can cost up to £800. This is partly to discourage malicious actions, of which more later. However, the creditor doesn’t have to be owed a large amount of money; anything over £750 will allow them to issue a winding-up petition against your company.

The advertising stage

First of all, the creditor has to serve the petition on your registered company office, then give you seven days’ notice. After this, they can advertise the petition, but this must be at least another seven days before the date when the petition is due to be heard.

You can still stop the advertisement if you act promptly. But even if you pay the debt in full at this stage, although the creditor has to stop the advertisement, the case can still proceed to court and be made public.

If you don’t stop the process, the creditor puts an advertisement in the London Gazette, advertising their petition to have the company wound up. The petition hearing is then advertised, also in the Gazette, and the petition then goes to the High Court to be heard.

The petition you receive will be stamped with the High Court stamp as the application will have been heard by a judge in the High Court. It will begin by quoting your company details. It will summarise what your company’s business is, how much the company is in debt to the party taking out the winding up order, and what the debt is for.

This isn’t the end of it however. Once the petition has been advertised, your bank will know about it through their monitoring processes. They will almost certainly freeze the company bank account immediately, so that directors can’t carry out any illegal acts such as selling the assets of the company. The freeze has the unfortunate effect of making it almost impossible for the company to continue trading.

Recently, the banks’ monitoring processes have in some cases been stepped up so that agents are employed to search the court register and identify companies that have a winding-up petition entered against them, even before the petition is advertised. It goes to show, that with people acting swiftly against your company, you must be doubly swift in taking action to forestall the worst consequences.

When HMRC is applying to wind up a Ltd company

As the creditor is very often HMRC, the petition may, for example, list what taxes you owe. This might be National Insurance Contributions (NICs). For these kinds of items, the petition will show how much was due, how much you have paid and how much is outstanding.

With an HMRC winding-up petition, you’ll also get a statement saying the amount of interest due on each type of overdue tax. At the end of the petition, the HMRC witness will state that yours is not one of the types of business that falls outside of the rules (for example certain kinds of financial company that hold investors’ funds) and that HMRC considers the company insolvent and is applying for it to be wound up.

What should I do when my company receives a winding-up petition?

At this point, the window is narrowing for you to take remedial action, so you need to act fast. You can’t sell the company or its assets; this is illegal. You yourself can’t appoint an administrator and nor can you sell new shares in the business. You’re also not allowed to put the company into “pre-pack administration”, a process by which the company sells its assets to a trade buyer, or a third party and then the administrator is appointed to oversee the process.

Can you pay?

If you can pay the creditor, you can have the petition dismissed, because the debt no longer exists. However, this isn’t always wise, because if another creditor finds out about the petition, they can take it over, and you’ll have to pay them as well, in order to get the petition dismissed.

If you pay the debt, you can apply to the court for a “Validation Order” which may allow the company to open a new account and get the bank to unfreeze the company assets. However, this will involve the company in legal fees because it involves applying to the court. And these fees could be hefty.

A valid Company Voluntary Arrangement (CVA) can help the company to get a Validation Order because it tells the court that the company has a valid basis for trading, going forward. It can allow you to restructure the company and implement a debt repayment plan. However, this will only be acceptable if the company has an underlying business that is sound and profitable going forward.

What happens after the judge hears the petition?

If there’s no prospect of the company paying its debts, either immediately or in the near future, the judge issues a winding-up order and this immediately triggers action by the Official Receiver who will begin the procedure required to liquidate the company.

The Receiver will ask for your company records and other information and it’s essential that you supply whatever you’re asked for. If you ignore these requests, you are guilty of a criminal offence and at this point the last thing you need is a criminal record.

Fighting back

Once the winding-up order has been issued, the company faces an expensive struggle to retaliate. A CVA may be acceptable if you suggest it immediately.

You can fight the petition in the courts if you believe that the amount is wrong, or that the company doesn’t owe the money. But we all know how expensive that is likely to be. Also, if there is at least £750 of undisputed debt, the petition can go ahead even if the total amount is wrong. Bear in mind too, that all those petitions, appeals, court costs and so on will have been added to the debt and you will have to pay those too.

Administration Orders can stop the clock:

Rather like the CVA, getting an Administration Order one will depend on whether the company has a long-term future. And once the winding up order has been issued, the court will need to consider whether administration is in the interests of the creditors and the party which brought the original winding-up petition.

However, if the Administration Order is granted, it stops the clock on the winding up order. A CVA can be put in place to enable you to pay the company’s debts back over a period of five years. Otherwise the company can be sold on. You, as a director, are entitled to buy the company if you can find the finance, and have not been found guilty of any misconduct.

Position of the Directors after a winding-up petition:

The Official Receiver will appoint a liquidator to deal with the company. The company directors will be investigated to check whether they have acted properly, in the light of their legal and financial responsibilities. If it’s shown that the directors carried on trading when they knew the company was insolvent, they can become personally liable for the company’s debts, so this is not a road to go down.

If the directors have been trading wrongfully they can be banned from directorships for a period of up to 15 years, but this would only be in an extreme case.

What do I need to be careful about?

There are several things you must not do. Don’t dispose of the company’s assets and don’t pick and choose which creditors to pay. There is information elsewhere on this site on how to deal with any personal liabilities in the event of the company being compulsorily wound up and liquidated.

Be very careful too about moving any company assets to a different company, or holding a “fire sale” of assets at very low prices in order to raise money. For one thing, if any of these assets (such as cars or vans) are being leased or subject to bank finance, you must not sell or transfer them without the approval of the owner, the finance company.

Selling company assets at below their true value may put you in breach of the Insolvency Act, and that has various consequences, none of which are helpful and some of which may lead to action against you personally. At the very least, you can be forced to restore the assets, or the value of them, to the company.

Make sure too, that the company follows procedure, by noting all the actions carried out by management and making sure that any key meetings are minuted, with decisions noted.

Get your accounts and spread sheets ready and assemble the bank statements, then hit the phone and get help. The earlier you call, the more options you’ll have.

If you think someone is acting maliciously:

It does sometimes happen that a competitor or supplier launches an unnecessary or malicious winding up order, specifically to damage your business. A judge hearing a winding up petition may think that there has been “abuse of process” by the party which has applied for the winding up order against your company. A situation that commonly arises, is one in which a supplier provides goods to a business, but the business finds them defective or unsatisfactory and refuses to pay for them because of this.

The supplier may then threaten to take out a winding up order on account of the bill not being paid. In some cases, the business hits back immediately with an injunction to prevent the order. But this is a very expensive route to take.

The court has now made it clear that it won’t tolerate people using the threat of winding-up orders to get payment of a bill that is disputed. So the judge is likely to dismiss this kind of petition as an abuse of process, and the petitioner will end up out of pocket, and without the judgement they were looking for.

Winding up order – the worst case scenario

Having your company liquidated by the Receiver because of a successful winding up petition from a third party is about the worst way to manage a company that has debt problems. It removes the initiative from the director and places it with the other party. Furthermore, as soon as the petition is advertised, it provokes action from the bank that can strangle a business that might have otherwise survived.

There are many other options if you get expert advice early:

If you get expert advice soon enough, then your advisor will consider Administration while you keep trading, in the form of a Pre-Packaged Administration where you sell the business on, including to yourself and other directors. There’s also what’s known as a “Phoenix”, where a new company is set up to take over from the previous, now liquidated company. This usually takes place after a Creditors’ Voluntary Liquidation.

Many directors allow their company to be wound up and then subsequently regret it because they realise that there were a number of other options that could have been used to manage the situation, if only they had taken action earlier.