Winding Up Petitions

The world is full of many different types of people, the majority good, honest and decent but there are also those that are the opposite that cannot see their own failings and are dishonest and strangers to the truth. People who will tell you bare faced lies knowing that they will be exposed for what they are in the future but are hell bent on trying to stop giving you what you are legally entitled to.

You come across people like this in the business world all the time, some of the world biggest crooks have carefully created an imagine of standing up for the little man, while in reality robbing them blind. Robert Maxwell is probably the best contemporary example, a Labour Party Member of Parliament who stole his employees’ pension contributions and committed suicide before being brought to book for his actions.

As in the past I have had a company go insolvent whilst owing me a considerable sum of money I tend to advise that at the first sign of financial trouble at a firm, be robust in ensuring you get paid monies you are legally due. The operative word here is “LEGALLY DUE.” Any arguments about the debt being legally due could and in all probability will mean the court is not satisfied it has been proven and the case will be dismissed. Where this happens the petitioner will have all costs awarded against them to pay. This can be extremely expensive.

Perhaps the shortest route to get the attention of these types of businesses and the people behind them if to issue a “Winding up Petition.” Although many regard this as a last resort, I regard it as the second resort after robust request for payment. This robust method should be Warning letter and Final Demand as in essence a Winding up petition says “can’t pay” rather than “won’t pay.” Although there is little difference in reality between these two positions.

What is a winding up petition?

A winding up petition is essentially the “nuclear option” in that it is making a request to the court to rule that the company is unable to pay its debts, it is insolvent and therefore should stop trading. Issuing a winding up petition is perhaps the most effective way of getting paid what you are legally due as long as the company is not close to bankruptcy.

Whilst it should not be used as a “debt collection tool” and should not be used to settle disputes in the normal turn of events. If you believe the company is effectively bankrupt and therefore trading fraudulently it is a mechanism that can work effectively. By way of an example, Ansell Murray Limited represented a party as the Referring Party in an Adjudication. The Responding Party acted unscrupulously at every turn, as they had done through the duration of the contract that led to the dispute. The Adjudicator required the Referring Party to pay his fee in full prior to issuing his Determination, which was done. The Determination ruled that Ansell Murray Limited’s client was entitled to all the monies claimed, Interest and Compensation in accordance with the Late Payment of Commercial Debt Regulations and crucially all of the costs that had been paid to the Adjudicator.

In effect everything that we requested. When the final date for payment came and went without any payment we wrote and advised that a Winding up Petition would be presented without further notice if the monies were not paid in full. The Winding up Petition was lodged with the Insolvency Court and as you are not allowed to advertise the petition for 7 days we knew this would be the acid test, as if they did not pay they would be wound up. Luckily for Ansell Murray Limited’s client, full payment was made within 7 days, meaning a hearing was not required. The company had to pay all our costs of bringing and then removing the Winding up petition as well.

However as a post script within 6 months the company had collapsed. Ansell Murray Limited unwittingly played its part in this as the company was simply refusing to return retention monies and this was helping in part to keep it afloat. Our payment, although only £35,000 holed their cash flow below the water line and they were unable to recover.

Interesting a large number of Creditors had gone down the route of making a claim in court, which they had won in the period after our Adjudication. Many never saw any of the monies they were due.

A Winding up Petition as the “Nuclear option” is expensive option and most importantly the amount due must not be in dispute in any way. Tax debts by default are generally not disputed, therefore Her Majesty’s Revenue and Customs (HMRC) use this method frequently. HMRC account for approximately 60% of all Winding up petitions issued.

 Process of issuing a winding up petition

Typically a creditor asks a solicitor to “wind the debtor company up” to recover debts, or to stop the company making its debts worse. The minimum threshold for commencing a Winding up is undisputed debt of over £750.

The application (the Winding up Petition) is made to the High Court asking the court to wind the company up at some point in the future.

A hearing date to “hear” the petition will be scheduled and this is usually 30-75 days between the petition being lodged and the actual court hearing date.

The process is legalistic and technical but requires quick action by the Directors of the company being petitioned.

Once a petition has been presented the Directors of the petitioned company cannot put the company into voluntary liquidation, undertake a pre-pack administration or dispose of company assets and the company cannot be sold. So in effect the Directors lose control.

Seven days after serving the Winding up petition, usually at its registered office; the petitioner who is the creditor that issued the petition can advertise it in the London Gazette. As banks monitor the London Gazette an advertised Winding up Petition will usually mean the company’s bank account is frozen.

If the company does not respond, or if no defence is mounted, then it is usually a matter of the judge issuing a “Winging up Order” and the process of ending the company as an entity begins.

What is important then is the status of Creditors and this will be examined in greater detail in the next post.

However if the court thinks that you are just trying to kill the company as you are a competitor then it will give the company more opportunity to try and restructure itself and can even occur where the legality of the debt is proved.  The court has to look at the position of other creditors as well. In the case of Dollar Land (Feltham) & Ors [1995] BCC 740 reported that a winding-up order should be rescinded if there was a real prospect that a Creditor Voluntary Arrangement (CVA) would be approved by the creditors and determined that the CVA majority would decide.

 As mentioned previously the advertising of a Winding up Petition has the effect of the Directors losing control of the company and where there is an appetite to pay normal expenditure such as wages and salaries this cannot happen without application for a Validation Order.

What is a Validation Order?

As mentioned banks usually freeze a company’s bank account when a Winding up Petition is served. A Validation Order is where the company has gone to the courts to apply to have the bank account unfrozen. Where granted, the Liquidator (Person appoint to wind down and close the company if the Winding up Petition is successful) is prevented from holding the bank liable for any monies withdrawn after the order is granted.

The application for a Validation Order is brought under Section 127 of the Insolvency Act [1986] as the act states “unless the court otherwise orders” whereby the court may allow disposition of the company assets, including withdrawals from a bank account

The Judge will require extensive evidence as to why the Court should grant the order. The evidence and information the Court will require is generally but not limited to the following:

  • The reason the petition was issued and the circumstances around this
  • Whether the petition debt is admitted or disputed. If disputed details of the basis on which the debt is disputed
  • Details of the company’s financial position (Details of its assets, including details of any security and the amount /amounts secured and liabilities. These details would need to be supported by documentary evidence e.g. the most recent filed accounts, draft audited accounts, management accounts
  • A cash flow forecast and income and expenditure projection for the period for which the order is sought
  • Details of the dispositions or payments in respect of which the order is sought
  • The reasons needed for such dispositions or payments to be made
  • Any other relevant information to the exercise of the court’s discretions

The Court will need to be satisfied by this evidence the company is solvent and able to pay its debts as they fall due or that the order sought will be beneficial to or will not prejudice the interests of all the unsecured creditors.

Dismiss a winding up petition

There are a two primary ways of having the Winding up Petition dismissed, such as:

  • Reaching agreement and / or paying the amount claimed before the Winding up Petition is advertised or before the hearing date.
  • The Debt cannot be proven

In the next post we will investigate the position of secured and unsecured creditors.

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