Common Defences for a Winding Up Petition
If a creditor has brought a winding up petition against you, don’t despair, there are legal defences available to you to prevent your company from being wound up. These range from showing that you can pay the creditor and that the company isn’t insolvent, to demonstrating that the debt is disputed. Here’s our full guide to common defences against a winding up petition.
If you have had a winding up petition filed against your company, the defences available to you will vary depending at which stage in the compulsory liquidation process you are at. We’ve broken the defences available to you at each stage in the process.
The Petition has been Filed but Not Yet Advertised in The Gazette
- Pay off the creditor. If you pay off the creditor (in addition to their costs of bringing the petition) prior to its being advertised in The Gazette, you should be able to halt the petition getting into the public sphere.
- Dispute the debt. If the existence or the amount of the debt is disputed, you can inform the courts that this is the case. Only take this step if you have evidence, as to do so falsely will be misleading the courts and can have very serious consequences.
- Enter the company into administration. Companies in the administration are subject to a moratorium that stops creditors from winding them up or bringing legal proceedings against them.
- Agree on a Company Voluntary Arrangement (CVA) with the company’s creditors (this must be approved by 75% of the company’s creditors).
- Negotiate with the creditor so that they don’t advertise the winding up petition in The Gazette. Once the petition is advertised in The Gazette, banks normally freeze the company’s bank accounts, which can often mean the end of the company as it is no longer able to trade.
- Request that the courts adjourn or cancel the winding up hearing. You will need to make a separate application for this and file a statement explaining why they should do so.
The Petition has been Advertised in The Gazette
- Dispute the debt.
- Negotiate a CVA with the company’s creditors.
- Apply for a Validation Order. While this isn’t a defence per se, if successful, it will unfreeze the company’s bank accounts and allow you to implement other steps as necessary.
- Enter the company into administration.
- Request that the courts adjourn or cancel the court hearing.You will need evidence to support these requests.
The Court Hearing
Show that the company can pay the creditor and is not insolvent. You will need to substantiate this with evidence.
Options if the Winding Up Order has already been Issued
- Apply for a Rescission Order. You can apply to rescind the winding up the order within five business days of the order being made if you can demonstrate that the company can pay the creditor or you couldn’t attend the winding up hearing. The court will hold another hearing to decide whether to rescind the winding up order.
- Apply for an Administration Order. An Insolvency Practitioner (IP) appointed by the company can apply for an Administration Order which effectively overrides the winding up order and allows them to be appointed as administrator.
- Apply for a stay of proceedings. This won’t reverse the winding up order but will stay its effect for a set period. The court can also order a permanent stay of proceedings, which puts the winding up order permanently on hold. The courts will order a stay of proceedings where you have agreed on a CVA with the company’s creditors.
Communicate With Creditors
The first stage to avoiding a winding up petition is communication. Communicate with the company’s creditors as soon as you know that it is having financial problems and try to renegotiate the repayment terms.
If the creditor is HMRC, you can propose a Time to Pay Arrangement for the repayment of overdue taxes. Keeping up a constant stream of communication is much more effective at managing the situation than burying your head in the sand and ignoring it.
Don’t Ignore Statutory Demands
The threat of a winding up petition is all the more concerning if the creditor has already served a statutory demand against you. Once a statutory demand has been served, you have 21 days to either:
- Pay the demand
- Negotiate with the creditor to settle the debt
- Take insolvency action
- Apply for an injunction to prevent the presentation or advertisement of a winding up petition on the basis that the debt is disputed
Failure to act in any of the above ways within the three week time frame and the creditor is within their rights to issue a winding up petition against your company. Calling the creditors’ bluff is an extremely dangerous game to play, particularly with companies that are owed significant amounts of money.
County Court Judgements (CCJs) are serious
Another potential precursor to a winding up petition is having a County Court Judgement (CCJ) issued against you to order the repayment of a debt. As is the case with a statutory demand, this is generally only an action a creditor will take after making multiple attempts to recover a debt by other means. Once a CCJ has been issued, a business has 14 days to respond to the court with the necessary paperwork or settle the debt one way or another, although it can ask for a 14-day extension if more time is needed. Fail to respond to the court request by disputing or paying the debt within 28 days and a CCJ will become a ‘Judgement Order’.
Once a CCJ has been issued, it will be reported on the company’s credit report and will greatly impact the company’s ability to access affordable finance for 6 years. It also opens the door for a winding up petition to be issued against you as it provides a clear indication that the company is insolvent.
How to Avoid a Petition becoming an Order?
Once a winding up petition has been issued, you may be able to avoid the company being subject to a winding up order. Time is very much of the essence here: the sooner you take action after receiving the petition, the better your chances are of avoiding a winding up order.
Seek professional advice as soon as you receive a winding up petition – there are a number of steps you can take within the first seven days after receiving the petition that can stop the situation from worsening. These include:
- Paying off the creditor who has brought the petition (including their costs of bringing the petition).
- Negotiating a Company Voluntary Arrangement.
- Disputing the existence or the amount of the debt. You should only do this if you have concrete evidence to show that the debt is incorrect.
- Entering the company into administration.
- Speaking to the creditor to try and persuade them not to advertise the winding-up petition. Once the petition is advertised the company’s bank accounts and assets will be frozen. Delaying the advertisement of the petition can give you more time to get the company’s finances in order.
- Submitting a request to the courts that they adjourn or cancel the hearing of the winding up petition.
Once seven days has elapsed after the winding up petition has been issued, it is highly unlikely that you will be able to stop the process, which will end with your company being wound up. It’s imperative that you take action quickly.
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