Winding up petitions

A creditors’ winding up petition is a formal legal process whereby a creditor can seek to place an insolvent company into compulsory liquidation on the grounds that it is unable to pay its debts.

It is by far the most hard-hitting course of action a creditor can take against a company to recover payment and where liquidation may be the only viable means to recover outstanding debts out of the company’s available assets and to facilitate an investigation into the conduct of its directors and management.

The grounds for a creditor seeking a winding up order against an insolvent company are set out in Section 122 of the Insolvency Act 1986 (“IA86”).

Typically, creditors will seek to rely on Section 122(1)(f) IA86 which provides that a company may be wound up if it is unable to pay its debts as they fall due.

The definition of a company’s inability to pay its debts is detailed in Section 123 IA86. Generally, creditors tend to rely on Section 122(1)(a) or (e) by either serving a Statutory Demand on the Company in the prescribed form for a debt exceeding £750 or otherwise proving to the satisfaction of the court that the company is unable to pay its debts as they fall due.

The strict answer is no – a creditor does not strictly have to serve a Statutory Demand on a company before presenting a winding up petition.

However, creditors often prefer to do so because an unanswered Statutory Demand means that a company is deemed to be unable to pay its debts as they fall due under Section 123(1)(a) IA86 whereas a creditor that chooses not to serve a Statutory Demand first will not have the benefit of such a deeming provision.

Further, a company may be able to defend a winding up petition where a Statutory Demand has not first been served if it can prove it is balance sheet solvent under Section 123(2) IA86.

It is therefore preferable to ensure at the very least that a written demand for payment is made on the company prior to presenting a winding up petition.

It is important that creditors are certain a winding up petition is an appropriate course of action to take against a company.

The aim of a winding up petition is to place an insolvent company into compulsory liquidation, which marks the end of the company’s ability to continue trading as a going concern.

Although presenting a winding up petition can be effective at recovering debts, they are not intended to be used as a means of general debt recovery; particularly where the underlying debt is genuinely disputed by the company on substantial grounds. For example, if the debt is disputed or the court considers that a winding up petition has been issued to force a creditor to repay a contested liability, there can be significant adverse costs consequences for a creditor.

Before presenting a winding up petition, creditors should first carry out checks for any existing insolvency proceedings against the company by either telephoning the Central Index number at the High Court or by carrying out a search through the court’s CE-filing system.

There should only be one extant winding up petition against a company (save for some limited and exceptional circumstances). If a creditor issues a winding up petition whilst another winding up petition is pending, there may be adverse consequences under the Practice Direction on Insolvency Proceedings. (“PDIP”).

It is important that creditors ensure a winding up petition is properly drafted and that its contents include those as prescribed by Rule 7.5 of Insolvency (England and Wales) Rules 2016 (“IR2016”) as follows:

(a) the name of the court (and hearing centre if applicable);

(b) the name and address of the petitioner;

(c) identification details for the company subject to the petition;

(d) the company’s registered office (if any);

(e) the date the company was incorporated and the enactment under which it was incorporated;

(f) the total number of issued shares of the company and the manner in which they are divided up;

(g) the aggregate nominal value of those shares;

(h) the amount of capital paid up or credited as paid up;

(i) a statement of the nature of the company’s business if known;

(j) the grounds on which the winding-up order is sought;

(k) where the ground for the winding-up order is section 122(1)(a), a statement that the company has by special resolution resolved that the company be wound up by the court and the date of such resolution;

(2) where the ground for the winding-up order is section 122(1)(f) or 221(5)(b) and a statutory demand has been served on the company, a statement that such a demand has been served and the date of service and that the company is insolvent and unable to pay its debts;

(m) a statement whether the company is an Article 1.2 undertaking;

(n) a statement whether the proceedings will be main, secondary, territorial or non-EC proceedings and that the reasons for so stating are given in a witness statement;

(o) a statement that in the circumstances it is just and equitable that the company should be wound up;

(p)  a statement that the petitioner therefore applies for an order that the company may be wound up by the court under the Act, or that such other order may be made as the court thinks just;

(q) the name and address of any person on whom the petitioner intends to serve the petition; and

(r ) the contact details of the petitioner’s solicitor (if any).

Creditors must also ensure that the winding up petition is verified by a statement of truth as required under Rule 7.6 IR2016

The purpose of verifying the winding up petition with a statement of truth is to certify to the court that its contents are true and that the creditor is entitled to seek a winding up order against the Company.

The statement of truth must be signed no more than 10 business days before the winding up petition is presented to the court or a new statement of truth should be signed (paragraph 9.6, PDIP).

Winding up petitions are usually filed in the High Court of Justice, Business and Property Courts either in London or another High Court District Registry. The High Court has jurisdiction to grant a winding up order against any company registered in England and Wales under Section 177 IA86.

In some circumstances, a winding up petition may be issued in a County Court but the vast majority are issued in the High Court.

When filing a petition with the court, the creditor is required to pay a court fee and the Official Receiver’s Deposit which contributes to the Insolvency Service’s costs of administering the company’s estate if a winding up order is made at the hearing.

When these fees have been paid, the court will provide a sealed copy of the winding up petition for the creditor to serve on the company.

A creditor must serve the court sealed winding up petition on the company in accordance with paragraph 2 of Schedule 4 IR2016

The winding up petition must be served at the company’s registered office by handing to a person who:

(a) at the time of service acknowledges being a director, other officer or employee of the company;

(b) is, to the nest of the knowledge and belief of the person serving the petition, a director, other officer or employee of the company; or

(c) acknowledges being authorised to accept service on the company’s behalf.

Normally a creditor will engage the services of a professional Process Server to serve the winding up petition on the company.

Service of a winding up petition must also be verified by a Certificate of Service

Following service of the winding up petition, the creditor must then advertise it in the London Gazette in accordance with Rule 7.10 IR2016 and not less than seven business days after service and not less than seven business days prior to the hearing.

The purpose of advertising the winding up petition is to afford other creditors an opportunity to either support or oppose the petition at the hearing. Very often the company’s bank accounts will be frozen following advertisement to avoid the company dissipating its assets.

The contents of the advertisement must comply with Rule 7.10(2) IR2016

The creditor must at least five business days before the hearing, file a Certificate of Compliance with the court under Rule 7.12 IR2016

The purpose of a Certificate of Compliance is to certify to the court that the creditor has complied with the relevant rules relating to serving and advertising the winding up petition.

The creditor must also prepare a list of appearances, which informs the court if any other creditors have given notice of their intention to either support or oppose the making of a winding up order at the hearing as required by Rule 7.14 IR2016

The list of appearances is normally handed to the judge prior to the hearing but may also be filed with the court (Rule 7.15 IR2016)

Provided the creditor has drafted the winding up petition properly and has complied with the relevant rules regarding service on the company and advertisement and if the court is satisfied that the debt is genuinely due and owing to the creditor, a winding up order will normally be granted at the hearing.

In these circumstances, the petitioning creditor’s legal costs are normally ordered to be paid as an expense of the liquidation out of the company’s assets because the creditor has successfully obtained a winding up order.

If, for example, the company seeks to defend the winding up petition and has filed a notice of opposition to the petition, the court may decide to order directions for a contested hearing.