In some cases, the mere serving of a winding up petition is enough to convince a company to pay the money it owes. If you decide to pay the debt before the court hearing, it’s important to make sure the winding up petition is withdrawn from the court record.
The court will only give permission to withdraw the petition early if the petitioner applies at least five business days before the first hearing, the petition has not been advertised, no other creditor has given notice about it, and the company consents. Once the petition has been advertised, paying the petitioner does not end it: at the hearing the court can substitute another creditor as petitioner, and the company can still be wound up. If another creditor is substituted onto the petition and the company is later wound up, the payment to the original petitioning creditor can still be at risk. Under section 127 of the Insolvency Act 1986, any disposal of the company’s assets made after the petition was presented is void once a winding-up order is made, unless the court orders otherwise. This rule depends only on timing. It is different from a statutory ‘preference’, where a payment puts one creditor in a better position than it would otherwise have in the liquidation. A preference can only be challenged if the payment was made within six months before the insolvency (two years for a connected person), the company was unable to pay its debts at the time or became unable as a result, and the company was influenced by a desire to prefer that creditor.
What happens if the petition is heard by the court?
A winding up petition can also be dismissed by the court. Being able to repay part of the debt, or proposing a Company Voluntary Arrangement (CVA), is not in itself a ground for dismissal. The court may take account of what the creditors as a whole want, and it weighs each creditor’s view by the value of its debt. If creditors holding most of the debt oppose a winding-up order, for example because a CVA would pay them more, the court can adjourn or dismiss the petition.
Other grounds for the dismissal of a winding up petition include:
- Abuse of process by the petitioner – For example, if the petitioning creditor uses the winding up petition to settle a dispute or gain a commercial advantage over a competitor.
- The debt is disputed on substantial grounds – If the company genuinely disputes, on substantial grounds, whether the debt is owed or how much, the winding-up court does not decide who is right. It dismisses the petition, and the creditor has to sue for the debt in the ordinary way. A dispute raised for the first time at the hearing rarely meets this test. The judge can award costs to either party.
What are the costs involved?
This really depends on the particular circumstances of the case. If you settle before the petition is advertised, the petitioning creditor can apply for the court’s permission to withdraw it, with the company’s consent. That usually costs much less than a contested hearing. Once the petition has been advertised, the settlement is dealt with at the hearing instead, where another creditor may ask to take over the petition.
If you want to dispute the debt in court or believe the petition is an abuse of process, you will require professional legal representation and the costs will rise considerably.
Have you considered a Creditors’ Voluntary Liquidation?
If you have been threatened with a winding up petition, placing the company in a Creditors’ Voluntary Liquidation (CVL) does not legally stop a creditor from petitioning. It often makes a petition unnecessary, but the court can still order compulsory liquidation, for example if creditors want an independent investigation. The key difference between a CVL and being wound up by the court is who decides. In a CVL the shareholders resolve to wind the company up, by a special resolution needing at least 75% of the votes, usually on the directors’ recommendation. In a compulsory liquidation the court orders the winding up, usually on a creditor’s petition. A CVL gives directors more time to prepare for the closure of their company. Acting promptly, for example by placing the company in a CVL once it is clear it cannot recover, can help show you took steps to minimise creditors’ losses. The liquidator will still investigate and report on your conduct as a director, as in any insolvent liquidation.
You must act now
If you have received a winding up petition, time is short. The petitioner may advertise it in the Gazette from seven business days after service, and once it is advertised the company’s bank accounts are likely to be frozen. Acting before that point is far easier than acting after it. Call us now on 0208 444 3400 to discuss your circumstances.