A winding up petition is a formal legal request submitted to a court, seeking the compulsory liquidation of a company that is unable to pay its debts.

For directors, understanding the legal avenues to challenge and potentially ‘set aside’ such a petition is crucial. A successful intervention can not only avert liquidation but also preserve the company’s operational continuity and credit standing.

Irrespective of the chosen legal ground, directors must act swiftly and decisively, ensuring robust evidence and legal representation to make a persuasive case before the court.

How can a Winding Up Petition be Set Aside?

Pay Your Debt in Full

The most straightforward method to set aside a winding up petition is by paying the debt in full.

Under UK law, if a company can settle the outstanding debt that led to the winding up petition before the court hearing, the petition usually becomes baseless. This action must be accompanied by providing the court and the petitioner with evidence of payment, typically through bank statements or a receipt issued by the creditor. It is essential to ensure that the full amount, including any interest and legal fees accrued, is paid to avoid any residual claims that could sustain the petition.

Dispute the Debt

If the debt claimed in the winding up petition is incorrect or disputable, the company has the right to challenge its validity. Under Section 123 of the Insolvency Act 1986, a company can only be deemed unable to pay its debts if the claim is undisputed.

To successfully dispute the debt, the company must provide substantial evidence, such as contractual disagreements, errors in the amount claimed, or proof of prior payment. This evidence must be presented in a sworn affidavit and submitted to the court prior to the hearing date.

Negotiate a Settlement

Negotiating a settlement with the creditor is another viable strategy. This involves reaching an agreement for debt repayment that may include restructuring the debt terms or agreeing on a payment plan. Such negotiations must result in a formal agreement, which should be communicated to the court.

A successful negotiation can lead to the creditor withdrawing the petition, especially if the new terms ensure that the debt will be settled in a manner satisfactory to the creditor. To prevent future disputes, it’s important that any agreement is legally binding and acknowledged by both parties.

Prove Procedural Errors

Another angle to contest a winding up petition is by identifying and proving procedural errors in how the petition was served or filed. According to the Insolvency (England and Wales) Rules 2016, specific procedures must be followed regarding the delivery and documentation of a winding up petition. If these procedures are not adhered to — for example, if the petition was not properly served to the company’s registered office, or if there was a failure to provide adequate notice as required by law — these errors can be grounds to set aside the petition.

Documentation of the procedural flaws, supported by relevant legal statutes and case law, must be presented to the court to substantiate such claims.

Show the Company’s Solvency

Under Section 124 of the Insolvency Act 1986, a company can only be wound up if it is unable to pay its debts. Therefore, providing evidence of solvency can effectively challenge the basis of the petition. This might include showing the court recent financial statements, cash flow forecasts, and other financial indicators that prove the company can meet its debts as they fall due. If the court is satisfied with the evidence of solvency, it may dismiss the petition on these grounds.

Enter a Company Voluntary Arrangement

A Company Voluntary Arrangement (CVA) offers an alternative route for companies facing winding up petitions. This legal agreement between the company and its creditors allows the company to pay debts over an agreed period, potentially at a reduced rate, while continuing to trade. Initiating a CVA requires drafting a proposal with the help of an insolvency practitioner, which is then voted on by creditors. Approval requires at least 75% (by debt value) of voting creditors to agree. Successfully entering into a CVA can lead to the winding up petition being suspended or withdrawn, as the arrangement demonstrates the company’s commitment to resolving its debts under supervised restructuring.

Close via Creditors’ Voluntary Liquidation

In cases where solvency cannot be demonstrated and a CVA is not feasible, another option to consider is a Creditors’ Voluntary Liquidation (CVL). This procedure involves voluntarily winding up the company through the agreement of its directors and shareholders, typically when the company is insolvent. By choosing a CVL, the company takes proactive steps to address its debts and liquidate its assets in an orderly manner, which can be a more favorable alternative to compulsory liquidation following a winding up order. Initiating a CVL requires the appointment of an insolvency practitioner to manage the liquidation process and distribute assets to creditors. Opting for a CVL can sometimes persuade creditors to withdraw the winding up petition, as it ensures a more controlled and potentially equitable distribution of the company’s assets.

FAQs on Setting Aside a Winding up Petition

Once a winding up petition is served, a company typically has 7 days before the petition is advertised, usually in the London Gazette. However, the actual challenge or response to the petition must be prepared and filed before the court hearing, which is typically scheduled a few weeks after the petition is issued. Acting quickly is crucial to prevent the petition from being advertised, as public advertisement can affect the company’s operations and banking activities.

If efforts to set aside a winding up petition fail, the court will likely grant the winding up order, leading to the compulsory liquidation of the company. The appointed liquidator will then proceed to sell off the company’s assets to pay off creditors. This not only results in the cessation of business operations but also likely in the dissolution of the company, with potential personal consequences for the directors, especially if wrongful or fraudulent trading is uncovered during the liquidation process.