A winding up petition is an official legal procedure that a company’s creditors, or shareholders in some cases, can use to recover a debt. This is done by petitioning the courts to step in, which often results in the compulsory liquidation of the debtor. Naturally, this isn’t a very desirable outcome for directors.
While winding up petitions are certainly a negative for struggling companies, liquidation isn’t necessarily a forgone conclusion. It is entirely possible to contest a winding up petition, and even have one set aside.
In this article, Clarke Bell will cover how to do exactly that, explain the winding up procedure and discuss exactly how a winding up petition can be set aside.
What is a winding up petition?
Winding up petitions are a last-ditch effort by creditors to get a debtor to make repayments. This is done by creditors making their case to the courts and petitioning for their involvement, with the end goal usually being compulsory liquidation. While this can be an effective method for creditors to recover their debt, it is an intensive, and often expensive, means of doing so. As such, even the most aggressive of creditors will not submit a winding up petition lightly. It will generally be used as a last resort, when all other viable methods have been tried and failed.
How can a winding up petition be served?
Most creditors are unlikely to dive straight into the winding up procedure without first trying other avenues. In most cases, this is a practical choice, as other debt recovery methods are preferable for a variety of reasons. However, even if a creditor were to be eager to submit a winding up petition, a few prerequisites must first be met.
The first requirement is that the creditor must first serve a statutory demand. This demand can essentially be seen as a prelude to a winding up petition, clearly displaying a creditor’s intentions to their debtor. A statutory demand can be served if there is an outstanding debt that has existed for less than six years, and the debt is in excess of £750.
Once a statutory demand has been served, the recipient will have 21 days in which to fully repay the debt, or reach an agreement with the creditor. If neither of these outcomes are reached, then the creditor is entitled to pursue winding up action.
Once the issue has been raised with the courts, a hearing will be scheduled during which both parties can make their case. It is of vital importance that both creditors and directors prepare thoroughly for this hearing to maximise chances of success. Once both sides have been heard, the court will reach a decision, ruling in favour of either party. If the court rules in favour of the debtor, then the winding up petition will be thrown out. If not, then the court is likely to serve the company with a winding up order. This effectively forces the company into compulsory liquidation, and takes control of the process out of the directors’ hands.
How can a winding up petition be set aside?
Receiving a winding up petition certainly isn’t pleasant, but it shouldn’t be a cause for despair. It is entirely possible for directors to dispute the petition, and even have it set aside, sometimes removing it from a company’s records. There are several methods of disputing a winding up petition, and the best one for you will heavily depend on your particular situation.
Pay your debt in full
The first solution is the most simple, but it is often much easier said than done. While there are certainly some cases where a winding up petition can be averted through debt repayment, for most companies receiving such a petition, this simply isn’t an option. If you are considering dealing with a winding up petition using this method, you must be cautious not to make preferential payments accidentally. Doing so is classed as wrongful trading, and can have disastrous consequences on your career as a director.
Enter a Company Voluntary Arrangement with creditors
A CVA is a possible option, and could be reached before the matter ever reaches the courts. Entering a CVA with your creditors will grant your company much-needed time to make repayments, and can help reach a better overall agreement for both parties. However, creditors considering a winding up petition may not be optimistic about your company’s ability to repay over the typical five-year time frame of a CVA, and may not be willing to enter into a legally binding agreement.
Dispute the winding up petition
If handling a winding up petition outside of the courts isn’t an option, then mounting a legal dispute might be a good idea. In doing so, you will be challenging the validity of your creditor’s petition, alleging certain details to be false, or challenging the legitimacy of the petition outright. If successful, this can see a winding up petition be thrown out of court.
While a potentially effective method of dealing with a winding up petition, a dispute is only viable if your creditor’s petition is faulty. Challenging a petition is serious, and doing so to a legitimate petition will be seen as frivolous. As a result, you may be seen as abusing the court process if you challenge a valid winding up petition.
Also Read: How To Stop a Winding Up Petition From HMRC
Close via Creditors’ Voluntary Liquidation
While there are some acceptable ways of dealing with a winding up petition, they do have serious drawbacks. For a better outcome, ensuring a winding up petition cannot be served to your company is often better than dealing with one that has.
Entering into a Creditors’ Voluntary Liquidation (CVL) can help with this. It is a formal insolvency procedure, one that affords directors an efficient means of voluntarily liquidating their company. Once a company is entered into the CVL procedure, this stops any action being taken by any bailiffs – which will give the company’s directors a great deal of comfort. Creditors can still submit a statutory demand or a winding-up petition, so it is important to move as quickly as possible to get the company into liquidation.
There are many more benefits to using a CVL, which can be found in our complete guide to the procedure.
Clarke Bell can help
Dealing with creditor pressure as a director of a struggling company is never easy. However, when creditors intend to serve your company with a winding up petition, a difficult job gets even harder to manage.
You don’t have to struggle alone.
Clarke Bell has more than 29 years of experience in offering a helping hand to companies in such a position, and we can do the very same for you.
Our team of experts can help you find solutions that reduce creditor pressure, and even make worries about a winding up petition a thing of the past.
Contact us today for a free, no-obligation consultation and find out what we can do for you.