What is a Winding Up Petition or Order from Creditors like HMRC?
A winding up petition is a legal notice issued by a creditor like HMRC with the intention of forcing a company into closure. The petition is presented at court where a judge will hear the case.
Often preceded by a Statutory Demand, it is amongst the most serious pieces of legal action any limited company can face and you should act immediately if you have received one.
If the debts remain outstanding, the creditor (often HMRC) will make an application to the courts to have the company compulsorily wound up.
Minimum Debt Threshold
Winding up Petitions can not be issued for debts of less than £750. There is no maximum threshold.
NB: Once the Winding up Petition is advertised, banks will automatically freeze company accounts meaning you will no longer be able to run your business. You must act promptly if your business is going to survive.
What is a Winding up Order?
A winding up order is the court order that follows a successful winding up petition and it is this procedure that places a limited company into compulsory liquidation.
As soon as the Order has been issued, the Official Receiver will commence the process of winding up your company.
How do I Stop a Winding up Petition?
Whether this is possible depends on multiple factors, including how quickly you take action after receiving it. There are certain actions that can be taken within the first seven days of receiving a winding-up petition that may help:
- Pay off the creditor – You will also have to reimburse the creditor via payment for their costs in serving the winding up petition. If other creditors have attached to the petition, you will have to pay them too as part of the debt recovery process.
- Obtain an Administration Order this would provide a legal ringfence around the company prevent further creditor action.
- Negotiate a Company Voluntary Arrangement (CVA) with the company’s creditors.
- Go into Voluntary Liquidation – There may a chance to enter into liquidation voluntarily, depending on the situation and timing. It’s worth knowing the merits of voluntary liquidation when compared with compulsory liquidation.
- Negotiate with the creditor so that they don’t advertise the winding up petition in The Gazette. This will help to give you time to pay the creditor before the company’s assets and bank accounts are frozen.
- Request that the courts adjourn or cancel the hearing if there is sufficient evidence.
- Dispute the debt. This step should only be taken where you have evidence that the debt claimed by the creditor is not correct and can be disputed.
If you are successful in the dispute, the creditor will be found to have abused the court application process, which is very serious. Read a full article here on stopping a winding up petition.
After the seven day period has elapsed and the winding up petition becomes an Order, it’s increasingly difficult to rescue the company. Without intervention it is likely that the court will appoint an Official Receiver to wind up the company.
How does the Process Work?
After the petition has been issued, the debtor has 7 days to respond, before the Petition can be formally advertised and this will alert the banks to freeze the company’s accounts. (NB, this can be undone using a validation order under under section 127 of the Insolvency Act 1986, assuming there is good evidence)
This brief 7-day window is often the only time that directors have to prevent compulsory liquidation so, if an alternative solution is to be found, the directors will need to respond swiftly.
It is possible to rescue a ‘business’ or a company even at this late stage, but the more time that passes beyond the advertising stage the more difficult it becomes.
Once the order has been issued, the court will appoint an Official Receiver which may be an appointed Insolvency Practitioner.
The Appointed Liquidator then liquidates the company assets and distributes the proceeds to its creditors such as HMRC.
What Happens When a Winding up Petition is Advertised?
At least seven days after the creditor has served the petition on the company (and at least seven days before the court hearing), the creditor may advertise the petition in The Gazette, an official journal of public record.
The petition advertisement alerts the remaining creditors to the petition and they can use the same petition to claim outstanding amounts owed to them.
Technically once the petition has been filed at court, none of the company’s assets should be transferred or sold.
Freezing of Company Bank Accounts
Once the petition has been advertised, you should expect your company bank account to be frozen immediately by the bank.
In some cases it is possible to apply to the court for a Validation Order to have them unfrozen, but only where there is clear supporting evidence.
Which Court Deals with a Winding up Petition or Order?
If the company involved has a ‘paid up share’ capital of more than £120,000, and or has debts in excess of £50,000 the petition will be heard in the High Court.
If the amount is less than this, it will be heard in the most appropriate court, nearest to the company’s registered office.
What Happens at the Hearing?
Winding up hearings happen at the High Court. You can either appear in person or instructor a solicitor or barrister to attend for you.
It’s best to arrive at least half an hour early to familiarise yourself with the court: they are busy places and there will be multiple hearings on any given day.
During your session, the judge will hear evidence and either rule for dismissal, adjourn the hearing, make an interim order or issue a Winding up Order.
If the Winding up Order is granted, the judge will appoint the Official Receiver to begin the company liquidation process.
Read our full article on this here.
How Long Does it Take to Wind up a Limited Company?
Typically, from serving the winding up petition to the Court hearing and serving a Court Order usually takes 4-6 weeks, but depends on how busy the Courts are.
The time of year will also impact as the Courts are closed in Summer and over the Christmas period.
What are the Potential Consequences for Directors?
The Official Receiver has to investigate the conduct of the directors as part of the insolvency proceedings and compulsory liquidation process.
In serious cases where the directors are found to be liable for misconduct, they can be disqualified from acting as a director of any company for a period of two years, up to 15 years. This also applies to shadow directors (those acting in the capacity of a director, although not officially appointed as such).
There are additional repercussions for those directors shown to have wrongfully carried on trading after they knew the company was insolvent and they can be held personally liable for any debts incurred after the company became insolvent.
For the creditor issuing the petition, they are as follows:
What are the Costs and Fees?
- Court Fee – £1180 (broken down into £280 – court fees and £1,600 petition deposit)
- Serving Proceedings – is the term for having a legal document ‘served’ personally. The current fee for this ranges from £75-£100
- Gazette Advertising Costs – It costs £79.40 plus VAT to advertise the winding up petition in the London, Edinburgh or Belfast Gazette (if required)
What are the Rules Around Winding up Petitions for Scottish Companies
Scottish law works slightly differently. You can read our full article on the subject here.