A Winding-up Petition is a formal notification brought to the court by a creditor to force a corporation into liquidation. If a winding-up order is approved by the court, compulsory liquidation can occur fast, signalling the end of the business due to insolvency.
Creditors can use winding-up petitions to shut down enterprises that fail to settle an outstanding debt, especially when the company is insolvent. When a creditor has attempted unsuccessfully to recoup their debt, a winding-up petition may be their final option for repayment by issuing a winding-up order.
We may assist you on what to do if a creditor has filed a winding-up petition in court, and if you are able to fight it with the help of an insolvency practitioner. But how do winding-up petitions operate, and at what point would a creditor pursue such action against a company that owes them money?
When can winding-up petitions be used?
If the creditor is owed £750 or more, they can file a winding-up petition in court, but they must first seek to recover the amount through serious discussion and reminders before issuing a winding petition.
A hearing is scheduled, and seven days after the petition is served, it is publicised in the Gazette so that any additional creditors are informed of the situation. This generally results in bank accounts being stopped and suppliers withholding their supply, exacerbating the company’s insolvency.
At court, the petition is either dismissed or a winding-up order granted, and the liquidation procedure begins with the appointment of an insolvency practitioner.
When are winding up petitions used?
Winding-up petitions are most commonly used against limited liability corporations, although they can also be used against unregistered entities such as sole traders and partnerships. To lawfully petition in this manner, the creditor must be due a minimum amount from the company that owes the debt:
A minimum of £750 for a limited business debtor that fails to pay its debts.
£5,000 or more for solo businesses and unregistered partnerships.
A typical situation includes a creditor making multiple attempts to reclaim their money or agree repayment, often leading to the issue of a winding-up order if unsuccessful. This generally entails mailing the debtor a Statutory Demand, which, if unpaid after 21 days, serves as proof to the court that the debt exists.
The timescales in the winding up process
- Your creditor makes multiple fruitless attempts to collect their debts. They may make a 21-day statutory demand for payment. (Unless they already have a court order against you).
- If this remains unpaid, and there is no possibility of agreeing on a repayment plan, they will begin the process of winding up your firm.
- A Sheriff Officer delivers the petition to your company’s registered address when it is delivered to the Court.
- A date for the court hearing is determined, generally 8-10 weeks following the issuance of the petition, but this might vary significantly.
- At this point, you must move swiftly to prevent compulsory liquidation; seven days after the petition is delivered, the hearing date will be announced in the Edinburgh Gazette, and your predicament will become public knowledge.
- Upon reading the advertisement in the Gazette, the bank will freeze your company’s accounts, thus barring any further trading, unless you obtain special authorisation from the courts via a validation order to allow particular payments into and out of the company’s bank account.
- If your firm does not take any action, the court will issue a winding-up order, and the case will be taken away from you.
- The Insolvency Practitioner will initiate inquiries into director behaviour, possibly putting you subject to personal responsibility and charges of malfeasance, unlawful trading, or other severe issues in relation to the company’s operations.
Can a winding up petition be halted once proceedings begin?
Once you get a winding-up petition, the outcome of your firm will be determined by the steps you take and the length of time you wait to respond. In general, you have the following four major choices for avoiding liquidation and the forced closing of your business:
1) Engage in informal discussions or a formal Company Voluntary Arrangement (CVA) to reach an agreement and establish a payment schedule with the petitioning creditor.
2) Ask the court for an adjournment so that the company can investigate a company administration procedure. If the court grants the administrative order, it will suspend any legal action conducted against your firm.
3) Dismiss the petition if you contest the debt’s legitimacy or correctness and have proof to back it up. A petition may also be rejected if it was not properly served on you.
4) Find enough money to meet the creditor’s payment demand. If the firm possesses valuable assets that might be utilised as leverage, asset finance may be a last resort fundraising option.
What happens if the court proceeds to grant a winding up petition?
A winding up order is a court order that compels an insolvent company into involuntary liquidation, which involves appointing an Insolvency Practitioner to liquidate all of the firm’s assets in order to repay creditors.
Once the court issues a winding-up order, the Insolvency Practitioner or another liquidator will be appointed to end the firm. They will examine your company’s affairs and assets in order to have them professionally appraised prior to sale at auction.
Once the company’s assets have been sold, the liquidator will distribute funds to your creditors based on their standing in the repayment ‘hierarchy.’ When this is completed, the company is removed from the Companies House registry and ceases to exist.
