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Top ten questions to consider when on the receiving end of a winding up petition
18th June 2019, 8:00 am
Occasionally an invoice slips through the net and doesn’t get paid or payment is delayed due to issues with the goods or services being provided.
Where the debt is for £750 or more, an impatient creditor may serve a statutory demand or a winding up petition if it considers there to be no reason for the delay.
Should this happen, deal with the situation immediately as the consequences of failing to do so can be devastating to reputation and finances, even if the company is not ultimately wound up. Here we explain some of the key questions and steps to consider.
1. What is a statutory demand / winding up petition?
A statutory demand is a formal demand for payment, which, if it remains unpaid – and unchallenged – for more than three weeks, will constitute evidence that a company is unable to pay its debts – or that the debt is undisputed – and can be used to support a winding up petition.
A winding up petition is a creditor’s petition to have a company placed in compulsory liquidation resulting in the company ceasing to trade and being wound up.
2. What happens following service of winding up petition?
If the outstanding amount is not then paid at least 7 days after service of the petition, it will be advertised in the London Gazette – a publication which is closely monitored by the banks. Upon notice of the petition, the company’s bank will normally freeze its accounts, potentially leaving the company without access to funds and unable to pay its other debts, even if it could have done so before. The company may struggle to secure credit from its suppliers and creditors may pursue outstanding debts more vigorously.
Also, many commercial contracts (including leases) can be terminated if insolvency proceedings are commenced – often including on the presentation of a winding up petition.
3. What if the debt is due?
It should be paid (probably along with the petitioner’s costs of issuing the petition) before the petition is advertised – i,e. within the 7 days following service of the petition. In doing so, the company should seek to obtain written agreement from the petitioner that the petition will not be advertised or pursued and will be withdrawn (with the permission of the Court) or dismissed at the petition hearing.
The Court will not dismiss the petition (even if the debt has been paid in full) if another supporting creditor takes over conduct of it.
If only part of the debt is undisputed and due, that part should be paid and the balance of the petition opposed.
4. What if the debt is disputed?
If there is a genuine dispute on substantial grounds, as to whether the debt is owed, or if the company has a right of set off which would cancel out the debt, or reduce it to less than £750, then the petition must be challenged and quickly.
5. How can the petition be challenged?
The first steps are to notify the creditor of the grounds of dispute and to request an undertaking that it will not proceed with the petition. If this is refused, the company should either seek an injunction to restrain notice of the petition being advertised in the London Gazette; or alternatively, the company can wait and just oppose the petition at the Court hearing. Although by that time, significant financial and reputational damage may have occurred due to the advertisement of the petition.
The Court will grant an injunction where it is evident that the petition amounts to an abuse of process or is otherwise bound to fail.
6. What if an injunction is refused?
The petition must be challenged at the petition hearing itself. A statement in opposition setting out the grounds upon which the petition is opposed must be filed at least 5 days before the hearing. Grounds for opposition include that the debt is disputed; there is a substantial cross claim; the English Courts lack jurisdiction; or the petitioner has failed to comply with the strict procedure set out in the Insolvency Rules 2016.
If the Court is satisfied that the challenge is genuine, it will order further evidence be provided and heard at a subsequent, longer hearing.
7. What if the petition fails?
If the petition is successfully challenged, the company will usually recover its costs of defending the petition on an indemnity basis (i.e., approximately 80-90% of its costs). However, a damages award for any loss or damage caused by an unsuccessful petition is rare and generally only payable by the petitioning creditor if there has been a malicious prosecution, i.e. where the petitioner had no reasonable cause in presenting the petition and acted with malice, causing the company to suffer loss as a result.
8. What if the petition succeeds?
If the petition is successful, a liquidator is appointed, the company’s assets will be realised, its debts paid off where possible, it will cease to trade and will be wound up.
Contracts entered into or assets disposed of after the petition was presented will be void. The company and its directors can be investigated for any wrongdoing which caused the company’s downfall which could result in a disqualification order and / or fine for the director(s) concerned. Transactions made at an undervalue can be attacked, company property reclaimed and action for wrongful trading or preferring particular creditors can be taken against directors.
9. Can the winding up order be appealed?
Yes, but an appeal will only be allowed where the decision was either wrong or unjust because of a procedural or other irregularity.
In certain circumstances, the petition can also be rescinded or stayed by the company’s creditors or liquidator.
10. What are the main action points?
- Have systems in place to ensure statutory demands and winding up petitions are flagged and dealt with immediately upon receipt
- Don’t ignore a statutory demand or winding up petition – it will rarely just go away and the Court can make a winding up order in a company’s absence
- Respond to the petitioner before the petition is advertised as the company’s financial position and reputation will almost certainly suffer otherwise
- Seek legal advice