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Winding-Up Petitions & The Consequences They Can Have On A Business.
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A Winding-Up Petition can have a detrimental Impact on a company and with the number of Compulsory Liquidations rising it’s important to understand the processes, risks and consequences of Winding-Up Petitions, we explain these below.
What is a Winding-Up Petition?
A Winding-Up Petition is a document filed at the courts usually by a trade creditor, financial institution or HMRC advising of the intention to force a company into compulsory liquidation, as a result of the company’s inability to pay its debts as and when they fall due and consequently the company is believed to be trading insolvent.
When can a Winding-Up Petition be filed?
A Winding-Up Petition can only be filed for an overdue balance over £750.00 and only if the company does not already have an existing Winding-Up Petition or Moratorium in place protecting them from legal action. If the balance owed has a dispute on the account then the creditor can issue a winding up petition on the undisputed balance, if that balance is over £750.
Issuing a Winding-Up Petition
Issuing a Winding-Up Petition not only comes at a cost but can dramatically impact the debtor company once filed, it is important to first gain an understanding of whether the debtor company won’t pay or can’t pay. The Winding-Up Petition process can be complex and it is crucial that every step is followed correctly as an incorrect step could result in the petition being dismissed by the courts. For this reason, seeking the assistance of a solicitor is strongly encouraged. Once the Winding-Up Petition has been filed with the courts, the courts will decide when and where the petition hearing will be heard before sealing the petition and returning copies of the papers to the petitioner’s solicitor to serve on to the debtor company at their registered office address. If the company is not available at this address, the papers can be served to a company director, secretary or the company’s last main place of business. At least seven days prior to the petition hearing date (and no sooner than 7 days after the petition has been served to the debtor company) the petition needs to be advertised in the London Gazette. Once a winding up petition has been filed, businesses tracking the financial information of the debtor company will start to be informed, likely resulting in the restriction of credit facilities and business bank accounts.
The Winding-Up Petition Hearing
On the day of the hearing, the courts may decide to;
Dismiss the petition – There are a few reasons as to why a petition may be dismissed such as; Full payment has been received, If it is believed that the petitioner has incorrectly issued the petition, if the company is able to pay a large amount of the debt owed, for instance if a CVA is proposed than the judge can leave the creditors to decide on whether to decline or accept.
Adjourn the hearing – The hearing is adjourned to be held at a later date, this may be due to the petitioning creditor receiving repayments and the debtor intends to make payment in full or the debtor may request more time to enter into a CVA.
Withdrawn – A Winding-Up petition can be withdrawn before the hearing by the petitioner. This will usually happen if payment has been received or a satisfactory agreement for repayment has been successfully negotiated with the creditor.
If a Winding-Up Order is made, an Official Receiver will be appointed and the company will enter into Compulsory Liquidation.
A winding-up order being “rescinded”
A winding-up order being “rescinded” refers to the reversal or cancellation of the order by the court. This typically occurs when new evidence or circumstances arise that warrant the reconsideration of the initial decision to wind up the company.
For example, if the company can demonstrate that it has settled its debts or has a viable plan to do so, the court may rescind the winding-up order. Alternatively, if there were procedural irregularities or errors in the original winding-up process, the court may rescind the order to rectify the situation.
Essentially, when a winding-up order is rescinded, it means that the decision to wind up the company is reversed, and the company is no longer subject to compulsory liquidation.
Supporting the Petition
Another creditor can choose to support the petition for a small fee, however again this is not without its risks. Should the petition fall down to the next supporter, this supporter is not guaranteed payment, even if the previous petitioner was paid in full. The supporter may also incur costs for the petition. The courts do not reveal who the supporters are, how much they are owed or how many supporters there are.
Risks of issuing a petition
Whilst Winding-Up Petitions can be very powerful, there are also risks for those issuing a Winding-Up Petition. Issuing a Winding-Up Petition may not result in payment. Unfortunately, if the company does not have any available funds or assets to sell in order to make payment, the company may enter into Compulsory Liquidation, resulting in the petitioner spending “good money after bad”. Additionally, if the petition becomes public knowledge, it may attract supporting creditors who are also owed and as a result the Directors may decide to enter into Voluntary Liquidation with the knowledge that they are not able to pay all supporters. A Winding-Up Petition does not make the petition a secured creditor. If the company enters into insolvency via either Voluntary Liquidation or Compulsory Liquidation, the petitioner may be considered an unsecured creditor and therefore any remaining assets will be shared equally among all unsecured creditors.
Creditor Payments whilst a petition is in place
If a creditor receives payment whilst a petition is in place, this may be viewed as preferential treatment of creditors if the company enters into Liquidation following the Winding-Up Petition hearing. The Insolvency Practitioner can order that these payments are returned in order to fairly distribute the remaining funds amongst unsecured creditors.