UK: The Basics: Responding To A Winding Up Petition

What should your company do if faced with a statutory demand or a winding up petition? Time is of the essence where there is a threat of formal insolvency proceedings. If a winding up petition is being threatened it must not be ignored. The consequences that can flow once a winding up petition has been advertised can be devastating, both to the company's reputation and its financial position.

We identify some of the key considerations and steps that should be taken immediately so as to reduce any damage that a winding up petition can cause.

  • What is a statutory demand / winding up petition?
  • What are the consequences?
  • What if the debt is due?
  • What if the debt is disputed?
  • Injunction to prevent notice of the petition being advertised
  • Challenging the petition
  • What if the petition fails?
  • What if the petition succeeds?
  • Things to remember

What is a statutory demand/winding up petition?

Winding up is also known as compulsory liquidation. It is action taken by creditors of the company which (if successful) will result in the company ceasing to trade and being wound down.

A statutory demand is a formal demand for payment which, if it remains unpaid for more than three weeks, can be used to support a winding up petition. A statutory demand can be used as evidence that a company is unable to pay its debts and, if the demand is not challenged, that the debt is not disputed.

All companies should have systems in place to ensure statutory demands and winding up petitions are flagged and dealt with immediately upon receipt.

For more on how to wind up a corporate debtor and the consequences that will arise once the winding up process has commenced see The Basics: How to wind up a corporate debtor .

What are the consequences of a winding up petition being served?

The consequences of a winding up petition having been served can be devastating. If the petition is advertised in the London Gazette, which the Insolvency Rules 2016 (IR 2016) confirm must be done seven days after the petition is served, the company's banks will normally freeze all of the company's accounts. Once that happens the company will generally have no access to funds and from that point may be unable to pay its debts, even if it had in fact been able to do so before.

The issuing of a winding up petition can also cause significant harm to the reputation of the company in question. It is likely that the company will be unable to secure credit from any of its suppliers and any outstanding company debts will very likely be pursued more vigorously by company creditors.

In addition many commercial contracts include provisions that allow for the contract to be terminated if insolvency proceedings are commenced (which will usually include the presentation of a winding up petition).

If a winding up petition is served on your company action must be taken to deal with it immediately.

What if the debt is due?

If the company accepts that the debt is due then it should try to arrange payment as soon as possible, and in any event before the winding up petition is advertised in the London Gazette. The company will then need to seek written agreement from the petitioner that the winding up petition will not be advertised and will not be pursued. Once the debt has been settled the company will require the petitioner to ensure the petition is withdrawn (with the permission of the court) or that it is dismissed at the hearing.

The court will not dismiss the petition (even if the debt has been paid in full) if another supporting creditor steps forwards and takes carriage of the petition. The court will order substitution of the supporting creditor if that creditor would independently have had the right to present a petition against the company.

If only part of the debt is due the part that is undisputed should be paid and the balance of the petition should be opposed.

What if the debt is disputed?

The company will need to challenge the petition. This can be done if there is a genuine dispute as to whether the debt is owed, or if the company has a right of set off and the amount the company could claim would cancel out the debt it owes, or would reduce it to less than £750.

The debt must be genuinely disputed on substantial grounds. There must be a "real as opposed to frivolous" dispute and there must be sufficient evidence available to persuade the court that there is a genuine dispute as to the company's liability to pay the debt. A mere honest belief that payment is not due will not be sufficient. The court will not be required to go on and assess the prospects of success for either party.

If the debt is genuinely disputed the company should confirm this in writing to the creditor as soon as the petition is received. The company must ask the creditor to provide an undertaking that they will not proceed with the petition. If the creditor refuses to do this then the company will either have to seek an injunction to restrain notice of the petition being advertised in the London Gazette or it can confirm that the petition will be opposed at the petition hearing on the grounds that the debt is disputed. Significant damage is already likely to have been done if the petition is challenged at the petition hearing, as it will already have been advertised in the London Gazette by that stage.

In either case the company will seek to recover its costs on an indemnity basis.

Injunction to prevent notice of the petition being advertised

If the debt is disputed and the creditor refuses to provide an undertaking confirming that the petition will not be advertised in the London Gazette, the company will have no option but to issue an application for an injunction - seeking an order that the winding up petition should not be advertised.

The court will grant an injunction restraining the petitioner from giving notice where the petition amounts to an abuse of process or is otherwise bound to fail. Evidence in support of an application must therefore be placed before the court, usually in the form of a witness statement setting out why the petition is an abuse of process or is bound to fail.

Challenging the petition

If the company needs to challenge the petition at the petition hearing itself it must file a statement in opposition at least five days before the hearing is listed. The statement must include details of the grounds upon which the petition is opposed.

In addition to opposing the petition on the grounds that the debt is disputed or that the company has a substantial cross claim the petition can also be challenged on the ground that the English courts don't have jurisdiction to wind up the company or that the petitioner has failed to comply with the strict procedure set out in the IR 2016.

If the court is satisfied that there is a genuine challenge to the petition, directions will be given as to the service of further evidence and a longer hearing set for a later date.

What if the petition fails?

If the petition is successfully challenged the company will usually recover its costs of defending the petition on an indemnity basis.

There is no general right for a company to recover damages for any loss or damage caused by an unsuccessful petition. In exceptional circumstances a company can seek damages in tort for malicious prosecution. This would require the company proving that it was successful in defending the proceedings, that the petitioner had no reasonable cause in presenting the petition and acted with malice, and that the company suffered loss as a result of the petition being presented. Successful claims made on this basis are rare.

What if the petition succeeds?

If the petition is successful the automatic consequences set out in our insight The Basics: How to wind up a corporate debtor will follow, the company's assets will be realised, its debts paid off where possible and the company will cease to trade and will be wound down.

If a winding up order is made any contracts entered into, any disposition of assets made or any enforcement proceedings completed after the date of presentation of the winding up petition may be set aside as being automatically void in accordance with the provisions of the Insolvency Act 1986 (IA 1986). The liquidator (or official receiver) will also investigate the company and its directors to ensure there was no wrongdoing which caused the company's downfall.

If there is evidence of wrongdoing by the directors of the company this will be reported to the Insolvency Service and they will investigate further. Those investigations could result in a disqualification order and / or a fine being issued against the director(s) concerned.

The liquidator has a duty to preserve the company's property and where possible to maximise the assets available for creditors. It might be possible for a liquidator to attack transactions and reclaim company property under the IA 1986 (for example by applying to court to set aside any transaction at an undervalue (section 238 IA 1986)), or take action against directors which could result in personal liability arising as a result of wrongful trading or paying one creditor in preference to another.

It will still be possible for the company to try and halt the winding up process by applying to rescind or stay the order, or by appealing it.

An application to rescind the winding up order must be made by a creditor or contributory of the company, or the company jointly with a creditor or contributory. A creditor, a contributory or the liquidator can apply for a stay of the order, which is more likely to be granted if the company is solvent or if a stay would be in the public interest.

A company may appeal against a winding up order but an appeal will only be allowed where the decision was either wrong or unjust because of a procedural or other irregularity.

Things to remember

  • Never ignore a statutory demand or winding up petition. Make sure the company has procedures in place to ensure a winding up petition - or a statutory demand - is dealt with as soon as it has been received. Legal advice should also be sought at this stage.
  • Respond to the petitioner before the petition can be advertised in the London Gazette - seven business days after service - as required by the IR 2016. Once the petition has been advertised the company's financial position and its reputation will almost certainly suffer.
  • Speed is of the essence if an injunction is necessary to prevent a petition from being advertised. An agreement must be reached with the petitioner or an injunction applied for within the seven day period following service of the petition.
  • A winding up order will be made by the court even if the company does not attend the hearing of the petition - as long as the petitioner has complied with all rules and requirements of the winding up process.

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions