When a company can’t pay its debts, creditors can apply to the court to ‘wind up’ (close) the business to recover the money they are due. This application is known as a winding-up petition. If successful, the petition will result in the company’s compulsory liquidation. It is a serious action that creditors typically only use as a last resort.
This article provides an overview of winding-up petitions, including their purpose, the process (from application to court hearing), and the potential consequences for companies facing such petitions from creditors.
The information below relates to petitions on companies in England and Wales. There are different rules when applying to the court to wind up a company in Scotland or Northern Ireland.
What is a winding-up petition?
A winding-up petition is a legal statement of intent by a creditor (or creditors) to force a company into closure due to significant unpaid debts. It is the first step in the compulsory liquidation process.
To make a petition to the court, the creditor must be:
- owed more than £750 from the company
- able to prove that the company is unable to pay them
However, before doing so, the creditor must first attempt to recover the debt by other means. This usually involves issuing a statutory demand or county court judgment (CCJ) to the company.
If a creditor’s winding-up petition succeeds, the company is put into liquidation. The court will appoint an official receiver (or insolvency practitioner) as a liquidator to take charge of the liquidation. Their role will involve:
- selling the company’s assets
- settling any legal disputes
- collecting any money the company is owed
- paying the funds to creditors
Issuing a winding-up petition is the strongest action a creditor can take against a company due to unpaid debts. Where previous payment demands have been unsuccessful, a petition is often the next (and final) step in the debt recovery process.
Ignoring a petition is not an option. The court will simply grant a winding-up order, resulting in the company’s compulsory liquidation and closure. It is vital to seek professional advice as soon as possible.
What does the process involve?
Applying for a winding-up petition is an expensive and time-consuming process. Several steps are involved before it reaches the compulsory liquidation and debt repayment stage. We outline these below:
Step 1 – A creditor issues the petition
The process begins when a creditor issues a winding-up petition to the court using Form Comp 1: Apply to wind up a company that owes you money. When applying, the creditor must also include Form Comp 2: Confirm details of a ‘winding up’ petition and evidence that the company owes them money. Typically, this will be a copy of:
- a statutory demand – this must include the amount and the date on which the demand was served
- a court judgment – this must include the amount awarded to the creditor (and their costs and interest), the date of the judgment, the court name, and the case number
Depending on how much ‘paid-up’ share capital the company has, the creditor must send the petition to either the High Court or the court nearest to the company’s registered office address. You can find registered office details and information on a company’s paid-up share capital using the Companies House search service.
If the paid-up share capital is £120,000 or more
The creditor must submit a winding-up petition online and pay the court fees of £322 at the same time. The petition will go to the High Court.
A petition deposit of £2,600 (to manage the winding-up) is also payable. After submitting the application, the creditor will receive an email explaining how to pay this.
They may receive reimbursement of these costs if the petition is successful and the company can afford to repay them.
If the paid-up share capital is under £120,000
The creditor will need to find the court closest to the company’s registered office. It must be a court that deals with insolvency and bankruptcy.
The petition can be submitted online if it is one of the following courts:
- Admiralty and Commercial Court
- Chancery Division
- Companies Court
- High Court (including Bankruptcy Court)
- London Mercantile Court
- Rolls Building
Again, they must pay the court fees online at the same time, and they will receive an email explaining how to pay the deposit.
The petition must be sent by post if it is any other court. The fees can be paid by cash or postal order or by sending a building society, bank, or solicitor’s cheque to ‘HM Courts and Tribunals Service’.
A court hearing will be scheduled
If the court accepts the creditor’s petition, a hearing date will be arranged. Typically, it will be scheduled for approximately 6 weeks after the petition is issued. This allows the company to dispute the petition or settle its debt before the court issues a winding-up order.
Step 2 – The petition is served on the company
After applying and paying the petition deposit, the creditor will receive a copy of their winding-up petition from the court. They must:
- deliver (‘serve’) the petition to a company director or employee – if it cannot be served in person, it can be attached to the company’s front door or left at its office
- provide a certificate of service to the court to confirm that the petition has been served
A ‘process server’ can be appointed to deliver the petition. The creditor’s solicitor can arrange this for them.
The day after serving the petition, the creditor must send a copy to the relevant administrative receiver, liquidator, administrator, or supervisor if the company is involved in:
- administrative receivership
- voluntary liquidation
- an administration order
- a voluntary arrangement
Upon receiving the petition at its registered office address, the company can pay or oppose it. If the company has a legitimate dispute of the debt and can provide evidence, the court won’t issue a winding-up order. However, if the directors don’t oppose it and the company can’t pay the debt, the petition will remain in place.
Whatever the situation, the directors should seek professional advice from a solicitor or licensed insolvency practitioner immediately.
Step 3 – Advertise the petition in The Gazette
Unless the company settles its debt beforehand, the creditor must formally announce the winding-up petition and details of the court hearing. The requirements are as follows:
- Place an advert in The Gazette to announce that they have served a winding-up petition—at least 7 working days before the court hearing, but no earlier than 7 working days after serving the petition on the company
- Send a copy of the advertisement and Form Comp 3 to the court—at least 5 working days before the court hearing
- Provide the court with a list of everyone who will be attending—by 4:30pm on the day before the hearing
The advert in The Gazette must include the following information:
- Confirmation that a petition to wind up the company has been presented
- Creditor’s name and address
- Name and address of the creditor’s solicitor (if they have one)
- The date on which the petition was presented to the company
- The court where the hearing will take place
- That any person wanting to attend must give notice of their intention to appear at the hearing
Advertisements in The Gazette are publicly available. The main reason is to ensure that other creditors are aware of the company’s insolvency. This allows them to join the petition and claim for their own debts.
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Some creditors choose to advertise early, while others wait until the latest possible time (i.e. 7 working days before the hearing). The consequences of such an advert can be incredibly damaging for a company. Therefore, many debtors attempt to come to an arrangement or settle the debt before the creditor advertises the petition.
Step 4 – The court hearing
The purpose of the court hearing is to enable the court to understand the circumstances of the case and determine the company’s solvency. It is an opportunity for both parties to make their case to the court and present evidence.
The company’s solicitor must attend the hearing, but the directors are under no obligation to give evidence. Likewise, the creditor will attend with their legal representation, who will act on their behalf.
To ensure everything is in order, the court will want to confirm that the creditor’s motivation for issuing the petition is genuine (i.e. to recover debt rather than for any other reason). The court will also check that the creditor has followed proper legal process throughout, for example, when serving the petition and advertising in The Gazette.
If the court determines that the company is insolvent, it will uphold the creditor’s petition, decide how to award costs, issue a winding-up order, and appoint an official receiver to supervise the company’s compulsory liquidation.
The liquidator will then begin selling the company’s assets and distributing the proceeds to creditors. The court will send a copy of the winding-up order to the company’s registered office address.
Other possible outcomes of a winding-up court hearing
Alternatively, the court may decide against issuing a winding-up order, instead choosing to:
- dismiss the petition if the company has settled the debt or come to an agreement with the creditor
- adjourn the hearing if the necessary documentation is incomplete or if the company and creditor are still in negotiations
- make an interim order
- make any other order that it thinks fit
The hearing will consider all factors. For example, if there are multiple creditors but only one favours compulsory liquidation, the judge may dismiss the winding-up petition. Administrators can also attend these hearings and make representations in a company’s favour. Depending on the circumstances, they may persuade the judge that the company can repay the debt if given more time.
Can I stop a winding-up petition?
Whether or not a winding-up petition can be withdrawn usually depends on how much time has passed since it was issued. If the company acts quickly, it will have a better chance of preventing the advertisement from appearing in The Gazette and/or avoiding the court hearing.
Upon receiving a winding-up petition, the company directors should seek professional advice from a solicitor and/or insolvency practitioner. Confirming that the debt outlined in the petition is accurate and legitimate is also essential. The following solutions may be possible:
- Pay the full debt immediately, which will invalidate the creditor’s petition
- Attempt negotiations with the creditor to arrange a Company Voluntary Arrangement (CVA)
- Dispute the petition or debt in court with supporting evidence
- Seek an adjournment (time to pay) of the winding-up petition. This would enable the directors to arrange settlement funding. Alternatively, it may give the insolvency practitioner time to restructure the business to pay off its debts
The creditor can withdraw the petition if the company pays the debt in full or makes an arrangement to pay. Occasionally, a creditor may withdraw a petition if they believe it won’t be upheld or the company won’t be able to pay the debt. In these situations, where a successful outcome is unlikely, they may determine that it’s better to avoid pursuing a costly procedure.
Potential consequences of receiving a winding-up petition
A winding-up order for compulsory liquidation is the main consequence of a successful winding-up petition. This will result in the appointed liquidator selling all of the company’s assets, repaying creditors, and closing the company. The business will no longer exist. However, there are other consequences to consider, too.
Frozen bank account
Banks and financial institutions regularly check The Gazette. If they discover a winding-up petition against a company, they will freeze any business bank accounts, stopping the company from continuing to trade. The directors will need a validation order to access the account.
Director disqualification
The company’s directors may face disqualification, meaning they will be banned from acting as directors or setting up or managing another company for a specified period.
Director disqualification will occur if their actions caused or contributed to the company’s insolvency. In the most serious of cases, the court may hold directors personally liable for company debts. This can happen if they are found guilty of fraud or wrongful trading.
Impact on credit rating
Receiving a winding-up petition can severely impact the company’s credit score and file. This can happen even if the company settles the debt or enters a payment arrangement with the creditor before the court hearing.
In some cases, the directors’ credit ratings may also suffer damage. For example, if they have given personal guarantees to the company’s creditors or are held liable for the debts due to their actions.
Reputational damage
Since winding-up petitions are on public record, receiving one can cause reputational damage to a company and its directors. Again, even if the company settles the debt and remains operational, many clients and suppliers will know the situation. Therefore, they may be reluctant to do business with the company.
Thanks for reading
Issuing a winding-up petition is a last resort for any creditor seeking to recover unpaid debts from a company. It’s a costly and time-consuming procedure for all parties. This is why it is necessary to first attempt alternative methods of debt recovery, such as statutory demands and CCJs.
Whether you’re a creditor looking to issue a petition or a debtor who has received one, seeking professional advice is crucial. A solicitor or insolvency practitioner can explain the process and the options available. With their help, you may find an alternative solution or be able to navigate the legal proceedings more easily.
Please feel free to comment below if you have any questions. For more limited company guidance and small business advice, explore the 1st Formations Blog.
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