A winding-up petition is the most serious threat any limited company can face.
Here we explain what it means, how the process works, and whether it can be stopped.
What is a Winding up Petition?
A winding-up petition (WUP) is the legal mechanism by which a business creditor, who must be owed over £750, starts the court process to wind up a company for non-payment of debts.
A winding-up petition can only be issued if the debtor has received and ignored a statutory demand served at least 21 days ago or the creditor has a court judgment against the debtor.
The process of compulsory liquidation, which involves an official receiver (an officer of the Insolvency Service) formally closing the company and selling off any assets, can result from a winding-up petition.
» MORE Read our full article on The Official Receiver and their Role in Liquidation
The most common situation where a winding-up petition is served is when debts are owed to HMRCTrusted Source – .GOV – HMRC as a Preferential Creditor.
What is the Winding-up Petition Process?
- A petitioner (usually a creditor, someone to whom the company owes money) files a petition with the court to have the company forcibly wound up (liquidated).
- After the petition has been issued, the debtor has seven days to respond before the petition can be formally advertised in The GazetteTrusted Source – Gazette – Petitions to wind up (companies) (2450), the official journal of public record.
- Banks typically freeze company bank accounts once the WUP is advertised. » MORE Read our full article on Frozen Company Bank Accounts
- The court will review the petition and determine if it has merit. If so, the court will issue a winding-up order. The petitioner (or their appointed representative, such as a solicitor) must attend the hearing.
- Once the winding-up order has been issued, an official receiver will be appointed to take control of the company’s assets and begin the process of liquidation (selling off the company’s assets to pay off its debts).
- The official receiver will also investigate the company’s affairs and report back to the court on any potential misconduct or wrongdoing by the company’s directors.
- The company’s assets will be sold off, and the proceeds will be used to pay off the company’s debts. If there are any funds left over, they will be distributed to the shareholders.
- Once all debts have been paid and any remaining assets have been distributed, the company will be dissolved and removed from the register of companies.
NB: After the petition has been issued, 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 passes beyond the advertising stage, the more difficult it becomes.
Who can File a Winding-up Petition?
- The company itself
- Other interested parties
In the UK, any creditor of a company with a debt of at least £750 can file a winding-up petition; this includes suppliers, lenders, and other businesses or individuals to whom the company owes money.
In addition to creditors, the company can file a winding-up petition if it wishes to be dissolved and have its assets used to pay off its debts.
Finally, other interested parties, such as shareholders, an assignee of a debt owed by a company, or a non-administrative receiver, may also be able to file a winding-up petition in certain circumstances.
It is important to note that a winding-up petition is a serious legal action that can have significant consequences for a company, including dissolution and the loss of control of its directors. As such, it should only be used as a last resort after other options have been exhausted.
If you are a creditor considering filing a winding-up petition, it is advisable to seek the advice of a qualified insolvency practitioner.
Grounds for Filing a Winding-up Petition
In the UK, a winding-up petition can be filed on the following grounds:
- The company cannot pay its debts: Insolvency is the most common reason for filing a winding-up petition. A creditor can petition the court to wind up a company if it cannot pay a debt of at least £750 due and payable.
- The company is trading fraudulently: A winding-up petition can also be filed if it is believed to be trading fraudulently, such as by misrepresenting its financial position or engaging in illegal activity.
- The company is no longer conducting business: A winding up petition can be filed if the company has not started its business within a year from its incorporation or suspends its business for an entire financial year.
- If the court deems it is it is just and equitable that the company should be wound up.
What are the Consequences of a Winding-up Petition
If the judge finds the winding-up petition has valid grounds, it will become a winding-up order. The consequences of a winding-up order can be significant for the company and its directors, employees, and shareholders.
Some of the most notable consequences of a winding-up order include the following:
- Dissolution of the company: When a winding-up order is issued, the company is legally dissolved and will no longer exist; this means that the company will no longer be able to conduct business or enter into contracts, and any ongoing business activities will need to be terminated.
- Loss of control for the company’s directors: When a company is wound up, control of the company’s assets and affairs are transferred to the official receiver, who is appointed by the court to oversee the winding-up process. The company’s directors will no longer have any control over the company’s affairs and will be required to cooperate with the official receiver.
- Impact on the company’s employees: When a company is wound up, its employees may lose their jobs and be entitled to redundancy pay. Employees may also claim other benefits, such as unpaid wages and holiday pay, through the government’s Redundancy Payments Service.
- Impact on shareholders: When a company is wound up, any assets remaining after the debts have been paid will be distributed to the company’s shareholders. However, it is essential to note that in many cases, there may be insufficient assets to pay off all of the company’s debts, which means that shareholders may receive little or no return on their investment.
Can a Winding-up Petition be Stopped?
Stopping a winding-up petition depends on multiple factors, including how quickly you take action after receiving it. Directors can take certain actions within the first seven days of issue, including:
- Pay off or negotiate with the creditor.
- Obtain an Administration Order; this would provide a legal ringfence around the company and prevent further creditor action.
- Negotiate a Company Voluntary Arrangement (CVA) with the company’s creditors.
- Go into Voluntary Liquidation – There may be a chance to enter into liquidation voluntarily, depending on the situation and timing. It’s worth knowing the merits of voluntary liquidation compared to compulsory liquidation.
- 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.
After the seven-day period has elapsed and the winding-up petition has been advertised, it’s increasingly difficult to rescue the company.
Once a Winding -up Order has been made, the court will appoint the Official Receiver to deal with the liquidation.
Generally speaking, because the Winding Up process costs the creditor who issues the petition quite a lot of money, they may adopt a more hostile approach and may seek to appoint their chosen liquidator (who may then look very carefully at your conduct as director), so if there is an alternative way to close your company, this may be a better option.
How Long Does a Winding-up Petition Take?
It takes approximately 10 weeks to issue a winding-up petition and for the case to be heard in court.
The length of time it takes to complete a winding-up petition process can vary depending on several factors, including the complexity of the case, the number of creditors involved, and the availability of the court.
Here is a general overview of the steps involved:
- The creditor files a winding-up petition with the court and serves it on the company.
- The company can respond to the petition and present its case to the court.
- The court holds a hearing to consider the petition and the company’s response.
- If the court grants the petition, it will issue a winding-up order and appoint an official receiver to oversee the process of dissolving the company and distributing its assets.
- The official receiver will take control of the company’s assets and sell them to pay off their debts.
- The official receiver will report to the court on the progress of the winding-up process and will submit a final report when the process is complete.
Again, the exact time it takes to complete the winding-up process will depend on the case’s specific circumstances.
Below, we have listed do’s and don’ts for directors of a company that has received a winding up petition.
Below, we have listed do’s and don’ts for directors of a company that has received a winding up petition.
- Do seek insolvency advice as soon as possible. It is important to understand the implications of the winding up petition and to have a plan in place for how to respond.
- Do consider whether the company has a viable future. If the company is able to trade out of its difficulties, it may be worth considering alternative options to winding up, such as a company voluntary arrangement or administration.
- If you plan to allow the winding-up petition to go ahead, uninhibited, do cooperate with the insolvency practitioner appointed to manage the winding-up process. It is important to provide them with all relevant information and to follow their instructions.
- Don’t try to dispose of company assets or transfer them to another entity in an attempt to avoid the winding-up process. This is illegal and could result in personal liability for the directors.
- Don’t continue to trade if the company is unable to pay its debts as they fall due. This could result in further debts being incurred and could increase the potential for personal liability for the directors.
- Don’t ignore the winding up petition or the insolvency process. It is important to take action and engage with the process in order to minimize the potential impact on the company and its stakeholders.
In conclusion, the winding-up petition process is a legal process through which a creditor can petition the court to order that a company be dissolved and its assets are used to pay off its debts.
- This is not a threat which can be ignored: directors should act decisively and seek professional advice
- Take care to understand your legal obligations as a director in situations of insolvency: failure to do so could open you to charges of wrongful or fraudulent trading
- Make a note of any actions taken by the board or company management once the petition is issued
- Do not pay anyone, or dispose of corporate assets once the petition has been issued
- Prepare all company accounts and records for your meeting with an insolvency practitioner
If you have been threatened with a Winding Up Petition and need advice and help, please do get in contact. It may be possible to convince the creditor not to proceed. We have experienced business rescue specialists who advise small businesses in challenging financial situations.
HMRC Winding-up Petitions
The most common situation where a Winding Up Petition is served is where debts are owed to HMRC.
There are two reasons why HMRC can be aggressive in moving to wind up a business. The first is that HMRC has preferential creditor status which means that HMRC might wind up even a company with relatively small assets because HMRC will have a decent chance of recovering some money.
The second reason why HMRC will often follow through on threats to issue a winding-up petition is due to public policy, to demonstrate that failure to pay corporate taxes may well result in your business being wound up.
If you are behind with your taxes and being pressured by HMRC, it is often best to get advice early, assess your options, communicate with HMRC and avoid being wound up by them. We can help, so please do get in contact.