A company which is unable to pay its debts as they fall due is considered to be insolvent.
A company may be deemed insolvent if a creditor who is owed more than £750 serves a statutory (formal) demand for payment on the company and the debt is not satisfied within twenty one days. Should such a statutory demand for payment go unanswered, the creditor may issue a winding up petition which may result in the company being placed into compulsory liquidation.
A company in receipt of a winding-up petition should seek expert legal advice immediately.
What is a Winding-up Petition?
A company’s failure to pay its debts as they fall due will be a serious concern to a creditor, eroding trust between the creditor and the company. A winding-up petition is a way for the creditor to try and recover the debt from a company. The threat of compulsory liquidation can be used tactically to force settlement of outstanding amounts or deliberately to investigate what assets are available for repayment.
Where promises of payment have previously gone unfulfilled, a petition is likely to encourage the petitioned party to pay if they have funds available. Any creditor owed more than £750 may take this course of action; however it is likely to be used as a last resort as it is a costly procedure and not conducive to an ongoing business relationship.
Dealing with a Winding-up Petition
The petition should be dealt with by the receiving party expediently. The company’s priority will be to prevent the issuing of the petition being advertised in the London Gazette. Once in the public domain, the advertisement will not only damage the company’s reputation but can also alert the company’s bank to freeze their accounts which will have detrimental knock-on effects.
Furthermore, once the advertisement is placed, the court must hold a petition hearing to determine whether to wind up the company.
Disputed Debts and Winding-up Petitions
Where a debt is partially disputed, the undisputed amount should be paid to the creditor and an attempt made to agree with the creditor not to advertise the petition.
A company may be able to dispute a debt in full if they can argue “substantial” grounds; the dispute must not be frivolous and there must be evidence that objectively there is a genuine dispute as to the company’s liability to pay the debt.
The company should also seek an agreement with the creditor to prevent them from advertising.
Abuse of Process
If the issuing of the petition is clearly unfair or an “abuse of the court process” it may be possible to prevent the petition from being advertised and have it rescinded. It may also be possible to stop the advertisement by way of an injunction, rare in practice, or by way of formal negotiation with the petitioner.
Where a petition has already been advertised an adjournment of the hearing can be sought.
A winding up order will not be made by court if the debt is genuinely disputed but damage by advertisement should be prevented at all costs. In the event that the company pays the petitioning creditor, another creditor may nonetheless continue with the petition in court, such is the severity of a petition.