Winding Up Petitions: Defending an order

A winding-up petition is a legal action taken by creditors to force an insolvent company into compulsory liquidation. This means that the creditor who presented the winding-up petition is seeking to wind up the company and force it into liquidation by the court.

A winding-up petition is typically filed by a creditor when a company fails to pay its debts under Section 122(1)(f) of the Insolvency Act 1986. The petition is presented to the court, and if granted, the company will be compulsorily wound up, and its assets will be distributed among the creditors. The conduct of the company’s directors will also be investigated by an appointed liquidator which could lead to them being ordered to contribute to the company’s assets.

Winding-up Petitions are not restricted to the non-payment of debts. For a example, a company can be wound where it is in the public interest to do so under Section 124A of the Insolvency Act 1986 and shareholders can seek to winding up a company on the grounds that it is “just and equitable” to do so under Section 122(1)(g) of the Insolvency Act 1986.

There are serious consequences for a company that has received a winding-up petition.

Any dispositions of company’s assets (such as any payments or transferring any type of its assets) from the date the winding-up petition is presented to the court until the date of the winding-up order, are void under Section 127 of the Insolvency Act 1986.

This means the company’s accounts will be frozen with the result that the company is unable to pay its debt, wages and key suppliers unless the company obtains a Validation Order authorising the payments to be made.

A winding-up petition can cause significant harm to a company’s reputation and trading operations and it may be unable to obtain credit or be subject to onerous credit conditions. Existing creditors may support the petition or take other action to enforce payment.

The company will need to incur legal costs in responding to the petition should it dispute the petition debt or need to continue trading before the hearing of the petition. If the petition debt is undisputed, the company will also need to pay the petitioner’s legal costs should it intend to pay the debt and avoid a winding up order.

The debt is disputed on substantial grounds.

If the debt is genuinely disputed, the court may dismiss the petition. The company must provide evidence that the debt is not owed or is subject to a genuine dispute. A mere honest belief that payment is not due will not suffice – there must be cogent evidence that the debt is genuinely disputed.

The fact that the petition debt (if based on a court judgment) is being appealed, that is not, in itself, sufficient grounds for dismissing a winding-up petition

If you consider that the petition debt is genuinely disputed, contact us without delay as it is very important to properly engage with the creditor about the debt at the earliest opportunity. It may also be necessary to apply for an urgent injunction to prevent the winding-up petition being advertised in the London Gazette under Rule 7.10 of the Insolvency (England and Wales) Rules 2016 which would very likely result in the company’s bank account(s) being frozen.

The company has a genuine cross-claim or set off argument.

If the company has a counterclaim exceeding the amount claimed in the petition or which otherwise reduces the petition debt to below £750.00, the court should not, as a general rule, grant a winding-up order provided the cross-claim is genuine and based on substantial grounds as referred to above.

If there is a genuine and substantial cross-claim, the court will either adjourn the petition to allow the cross-claim to be determined or dismiss the petition.

Other grounds to challenge a winding-up petition.

If the company can evidence that it is solvent and able to pay its debts as they fall due, that can be a reason to challenge a winding-up petition or obtain an adjournment to give the company time to make payment. This could be demonstrated by providing financial statements, cash flow projections, or evidence of funds available to settle the petition debt. Solvency means the company can pay its debts as they fall due.

The company could challenge the petition on the grounds that the English courts do not have jurisdiction to wind up the company. However, this is a complex area which requires specialist legal advice.

Where there are any technical defects in the winding-up petition, for example, significant errors in the petition or if the creditor has failed to follow the procedural requirements under The Insolvency (England and Wales) 2016 that can be a ground to challenge the petition. However, technical or procedural defects (depending on the severity) are unlikely to result in the winding-up petition being dismissed but could result in adjournment affording the company time to make payment or to challenge the debt.