What is a Winding up Petition?
A Winding up Petition is a formal document issued by a company Creditor in the Court, which requests them to force a company to cease trading and enter Compulsory Liquidation. A Creditor must be owed at least £5,000 to apply for a Winding up Petition, and will usually be applying it as a last resort, having already tried to reclaim their debt via a statutory demand or bailiff action. A Winding up Petition will result in a company’s bank account being frozen as soon as the bank becomes aware, and additional Creditors will have the opportunity to ‘piggyback’ on the back of the original petition should they also become aware of it.
What will happen if I do nothing?
If a Creditor has grown tired of trying to recover a debt amicably and is threatening to apply for a Winding up Petition but has not yet done so, then failure to take action will most likely result in them applying to the Courts for a Winding up Order. Once they have done this, the Courts will set a time and date for a hearing of the petition and your Creditor will serve the petition upon you, at least 14 days’ before the hearing. Your Creditor will then advertise the petition in the London Gazette, which may encourage more of your Creditors to endorse the petition, and will prompt your bank to freeze your company account even if it’s in credit.
If no action is taken at this point, the hearing of the petition will proceed and the Winding up Order may be made. If the order is made your company will enter Compulsory Liquidation. This will result in the sale of company assets, the closure of the company and an investigation into the conduct of the Directors and company practices.
What will the effects of Compulsory Liquidation mean for my company?
Compulsory Liquidation is often regarded as the least favourable insolvency process, as there are potentially higher fees, lower returns and the removal of the opportunity for an orderly cessation of trade and a possible restart.
Click Here for more information on Compulsory Liquidation
My company has been issued a Winding up Petition, what can I do?
If you have been threatened with or have already been issued a Winding up Petition, it is imperative independent professional advice is sought immediately. A delay in taking action to deal with the situation could result in a far worse outcome.
If the debt is disputed, the Court and the petitioning Creditor will need to be informed. If the dispute has not been resolved by the petition hearing date, the Court will give guidelines about how the issue will be dealt with. But could make the order to wind up the company.
If the debt is not disputed and the debt can be repaid in a reasonable time-frame, arrangements need to be made with the petitioning Creditor in the first instance. If the Creditor accepts payment terms, the hearing of the petition will still take place, but the Court will adjourn the petition to give the company time to pay.
If no action is taken, it is highly likely the Court will grant a Compulsory Winding up Order. This action will result in the company being placed into Compulsory Liquidation. The Official Receiver will become the Liquidator, but may choose to appoint an Insolvency Practitioner that are on their register to act as Liquidator. The Directors will not be able to nominate their preferred Liquidator unless they are a Creditor of the company.
The Official Receiver has a duty to investigate the cause of the company’s failure and to investigate the actions of the Directors. The company will be forced to stop trading, staff will be made redundant and the assets (if there are any) will be sold.
It may still be possible for the Directors or shareholders to purchase the business and assets for use in another company structure, but the Liquidator is obliged to sell to the highest bidder.
Can the petition be challenged?
If a Director disputes a petition and the petitioning creditor refuses to withdraw, a defence will need to be lodged in Court at least five days prior to the hearing. The defence will need to include details of the reasons for the dispute and some evidence that will support the defence of the petition. If the company agrees with part of the claim, this will need to be dealt with separately and ideally paid in full with costs before the hearing.
If a defence has been submitted prior to the first hearing, the Judge will listen to reasons for the defence and assess whether to grant an adjournment of the hearing to give the two parties a chance to resolve the dispute before the second hearing.
The process for rescue.
- Discuss the options
- If you want to rescue the company or save the business, it is always better to do this when the petition has only been threatened, as the options available are limited and more complex to implement if the petition has been issued. However, whether a Winding up Petition has just been threatened or has been issued, it is crucial that you get professional advice quickly. The first step is to get in touch with a Wilson Field insolvency consultant who will discuss your company’s financial position and the options available. This will be done initially over the telephone, with a more in-depth assessment being conducted in a free face to face consultation at a later date. During this meeting Wilson Field will be able to give you an idea of how viable the future of the company is, and an appropriate course of action can be decided upon.
- Instruct us to work for you formally
- When a decision is made to have us act on your behalf, the Directors will need to do this by board resolution. We can supply the required documentation if you are unsure how to do this.
- Implement the rescue plan
- Once instructed our professional team will work with you to formulate a plan of action that will best suit your aims and objectives. The options that are available will be wholly dependent on what stage the Winding up Petition is at and whether or not the petition has been threatened or has been issued. There are many more options available when the petition has only been threatened, so it is imperative for Directors to seek help at the earliest opportunity.
For a list of the rescue options available please refer to ‘What are Rescue Options and how can they help save my company?’
What are Rescue Options and how can they help save my company?
If the core business is viable, but overwhelming debts have made it unworkable there are a number of rescue alternatives available. These alternatives can provide an alternative to ‘throwing in the towel’ and letting the company be placed into Compulsory Liquidation.
Depending on the amount of time the company has before the petition is issued will determine how many options are available.
Rescue options if the petition has been issued:
- Administration or Pre-Pack Administration via a Court application.
- Administration or Pre-Pack Administration by qualifying floating charge (QFC) holder appointment (i.e., a bank or factoring company who has a floating charge can appoint their own Insolvency Practitioner). Also referred to as a QFC appointment.
- Creditors Voluntary Liquidation (CVL), but only if the petitioning creditor agrees to drop the petition (petitioning costs will usually need paying and the creditor may request some provisos before doing so).
- Company Voluntary Arrangement (CVA). The petition fee and solicitor costs paid by the Creditor will usually need to be paid, and the Creditor may request some provisos before dropping the petition).
The different options listed are explained in further detail elsewhere on the website, and this information can be found by clicking on the links above.
It is important that the petitioning Creditor is not paid off without conducting a financial and business review as well as receiving some professional advice about the company’s options. Paying off the petitioning Creditor does not always have it dismissed. If another Creditor becomes aware of the petition, they will be able to ‘take over’, ‘adopt’ or ‘attach to’ the petition when the other Creditor drops it. The attaching Creditor would then need to be paid to have the petition dismissed.
In some circumstances, it may be the best option just to allow the petition to run its course and let the company enter Compulsory Liquidation. Alternatively, if the Directors would prefer to nominate their own Liquidator for a Company Voluntary Liquidation, this can be done quickly if the petition has only been threatened. If a petition has been issued, the permission of the petitioning Creditor is usually required.
What if I dispute the debt claimed in the Winding up Petition?
The petitioning Creditor and the solicitor of the petitioning Creditor, (if a solicitor is instructed) needs to be informed of your dispute in the first instance. The Directors need to write to them providing the reasons for the dispute and request the Winding up Petition is withdrawn.
If an application to withdraw the petition is refused, and the Directors feel they have bona fide reasons for the dismissal of the petition, it is possible to apply for a Court injunction. An injunction will prevent the petition being advertised in the London Gazette. If the petition is advertised the company bank accounts will be frozen and other Creditors will be able to find out about the hearing. (For more information about this see “What will happen when an advert is placed in London Gazette?”)
If the dispute has not been resolved prior to the hearing, then the Directors can choose to defend the Winding up Petition. If a choice to defend has been made the Court will provide directions on how your defence will be handled at the planned hearing.
What will happen when an advert is placed in the London Gazette?
A company’s bank accounts are frozen when the bank becomes aware of a Winding up Petition. The company will be unable to issue payments to staff, Creditors, suppliers or anyone else. It is not even possible to pay the petitioning Creditor if there was sufficient funds to do so. Section 127 of the Insolvency Act effectively ‘voids’ any disposal of the company’s assets or cash at bank after a Winding up Petition has been issued. If a bank does not freeze the accounts and the company is subsequently wound up, the Liquidator can investigate and recover any amount taken from the bank account. It is for this reason that banks need to freeze company accounts to protect their position in situations such as this.
If the petition is disputed or there is a genuine belief the petition should be dismissed and the business is solvent and can continue trading, the company can apply for a Validation Order. A Validation Order application asks the Court to make an order to ‘un freeze’ the bank account and states the disposal of company assets and bank account transactions will be considered valid business transactions. The order also states these transactions will not be voided in the event a Winding up Order is granted. The Judge will need evidence backing up the application. Typically the information required would be (but not limited to) as follows:
- An explanation of why (in the Director’s opinion) the petition was issued.
- Is the petition debt agreed or disputed?
- If agreed, how will the company plan on discharging this debt? (E.g. is there enough money available in the frozen company bank account to do this).
- If disputed the basis of the dispute will need to be explained.
- An explanation of the company’s current financial position.
- Comprehensive asset and liabilities list (this needs to detail any security held on assets and the amount of that security).
- Details of the payments required to be made from the bank account.
- Details of assets that need to be disposed of.
- A cash flow forecast for the period that the Directors want the order to cover.
As much as possible, all of the above needs to be backed up with documented evidence. This may include management accounts, the company’s latest accounts filed at Companies House or any other evidence that verifies what is being sent.
It may be possible; if certain conditions are met, to ask the Court for an injunction that would prevent the petition being advertised.
What is a Validation Order?
A company bank account is automatically frozen when a Winding up Petition is advertised in the London Gazette. If the company needs to make payments from any of the company bank accounts that have been frozen, an application for a Validation Order will need to be made.
The Validation Order application should be made to the Court in which the petition hearing is taking place. It also needs to be served on the petitioning Creditor. The application will need to include a cash flow forecast, a statement of affairs and a proposed payments list including an explanation of why the payments should be paid.
This application needs to convince the Court that making payments will be beneficial to both to the Creditors and the company. A Validation Order has a better chance of being approved if the Court can be convinced of one of the following:
- The Winding up Petition will be dismissed.
- The company is solvent and can pay the petition from cash at bank or from money due into the account.
- If the debt is valid, but the company simply cannot pay, it is still possible to have a Validation Order approved if there is strong evidence that a Company Voluntary Arrangement will be approved by creditors.
If the company is wound up at the petition hearing, or if there has been a dilution of assets that was not agreed by Court following the date of the petition, these transactions will be void. It is important that a company applying for a Validation Order takes this into consideration.
In some situations, (such as fixed assets being disposed of for cash while the bank accounts are frozen) a Validation Order can be applied for retrospectively to justify the Director’s actions, however this is not a recommended course of action as the courts may not approve of the disposals. It is always recommended that the permission of the Court be sought before disposing of assets. The application can be made even after a Winding up Order is made.
We recommend that if you have been issued a Winding up Petition and are considering an application for a Validation Order you should get professional advice.
Wilson Field offer a fast and efficient service with nationwide coverage from a network of regional offices, meaning a free consultation can be arranged at a time and location most convenient to you.
If your business has been threatened with the issue of a Winding up Petition or has already received one, the importance of seeking help immediately cannot be overstated. Get in touch today to arrange a free confidential consultation with no obligation.