A winding up petition can be presented against a company provided that the creditor is owed more than £750. The first step in initiating winding up proceedings is the statutory demand. A statuary demand is a written notice, in a prescribed form, which gives the debtor 21 days to make payment or reach a settlement in the absence of which the creditor will present a winding up petition.
Pursuant to the Insolvency Act 1986 failure to satisfy a statutory demand will deem the debtor company as being unable to pay its debts as they fall due and thus insolvent.
In many cases the statutory demand and the threat of a subsequent winding up petition is sufficient to achieve payment. Where payment is not made it is usually because the debtor is unable to pay or it disputes its liability to pay.
Presenting a Winding up Petition – the process
Once a winding up petition has been presented against a company it must be served on that company and then advertised (no sooner than seven days after it has been served) in the London Gazette. The effect of this is that the company’s bank account(s) will be frozen to prevent the unlawful dispensation of any monies in its account. This will prevent the debtor from being able to trade any further.
At this stage even if a settlement is agreed with the petitioning creditor the company’s fate could be out of its hands as another creditor may apply to the court for permission to be substituted as the petitioning creditor. If this occurs then any settlement with the petitioning creditor may be unwound in an attempt to ensure that all unsecured creditors are on an equal footing in the event that the company is subsequently wound up.
This highlights the risk of using winding up proceedings as a debt collection process as, if the company is wound up, all the company’s creditors will be seeking payment and the company may not have sufficient assets to meet them particularly as unsecured creditors will only receive a dividend once secured creditors and the costs of the liquidation have been paid.
Facing a Winding up Petition
If your company is faced with a statutory demand or a winding up petition, you should take immediate action as failure to act could result in the petition being advertised, its accounts being frozen and ultimately it could result in the company being wound up. This will most likely stop all lines of credit for the company as most contractual covenants will consider insolvency proceedings as an event of default.
Where the petition is undisputed the petitioning creditor should be contacted immediately to make arrangement for payment / settlement in exchange for insolvency proceedings ceasing and this should be recorded in a written agreement.
Where the petition debt is disputed or where it is admitted but the company has a cross claim equal to or exceeding the debt, the petitioning creditor should be contacted immediately with the grounds of the dispute set and a request for an undertaking that the petition will not be presented, or where it has been presented, it will not be advertised.
If the undertaking is declined then the company should consider making an application for an injunction to restrain the creditor. Whilst this could be an expensive application, if successful, the company will be awarded its costs from the petitioning creditor. Equally, if unsuccessful, the petitioning creditor will be awarded its costs for defending the application.
It should be noted that the court will only grant an injunction if the debt is disputed on substantial grounds. Where only part of the debt is disputed, the undisputed sum should still be paid to the creditor.
The presentation of a winding up petition is a high risk option for any creditor as it is a heavy handed action, expensive, may well not result in the best prospects of recovery and once issued, there can be unforeseen consequences such as another creditor taking over the petition even if you are paid as creditor which may mean that any funds you receive end up having to be put back into a pot of assets if the petition proceeds.
There may also be a technical challenge to whether the company is insolvent – just because a company appears to be insolvent does not necessarily mean that it is in legal terms. The courts do not like the winding up process being used a method of debt collection and there is a real danger that the petition may be disputed (which could have severe cost implications).
There is also a danger that, having incurred the costs of presenting a petition, there may be insufficient assets in liquidation to repay the petitioning creditor. Accordingly, where insolvency proceedings are being considered it may be best for the creditor to accept a reduced amount in settlement or a repayment plan in lieu of presenting the petition as the petition could result in a nil payment.
On the other hand the presentation of a winding up petition may result in quick payment due to the consequences for the debtor company (such as the negative publicity and stigma a petition would bring with it) unlike issuing a claim which can be a slow and expensive process particularly where there is uncertainty as to how any judgment is to be enforced.
In any event winding up proceedings should be considered and commenced with caution.