A winding up petition is a legal action that a creditor can take to request the compulsory liquidation of a company that owes them money. It is one of the most serious steps a creditor can take and it is usually only considered as a last resort, when other attempts to recover the outstanding debts have failed. While a winding up petition does not immediately trigger the compulsory liquidation process, it is the first step on this path.

As such, it is not necessarily the end of your business if a creditor issues a winding up petition, but it is important to seek legal advice urgently. For example, it may be possible to negotiate a payment plan with the petitioning creditor or even negotiate a reduction in the debt, and thereby have the petition withdrawn, but it is vital to take the right approach.

Similarly, you should speak to an experienced corporate solicitor if you are seeking to take legal action and pursue a winding up order against a debtor company. While, in some cases, it can be the only way to recoup money that is owed to you, you may not receive the full value of the company's debts, depending on the company's assets and its financial obligations to other creditors. On the other hand, a different approach may enable you to recover more of the debt.

Here, the experienced corporate insolvency solicitors at JMW explain how a creditor can secure a winding up petition, how it works for an insolvent company and its debts, and the options that all parties have in response.

How does a winding up petition work?

The process of pursuing a winding up petition can begin with a statutory demand, which is a formal written notice from a creditor to request payment of a debt. If the debtor company does not (or cannot) pay the debt within 21 days, the creditor can apply for a winding up petition under the Insolvency Act 1986. However, it is not necessary for a statutory demand to be issued prior to a winding up petition being presented. This is currently an option for any creditor owed £750 or more, and may also be used by multiple creditors acting together. A winding up petition is submitted to the High Court and seeks an order for a company that cannot pay its debts to be placed into compulsory liquidation.

After presentation of the petition, a court hearing date will be arranged for the debtor company's directors to attend. Seven days after the petition is issued, a notice will be published in The Gazette (formerly the London Gazette), at which point it becomes public knowledge and other creditors will learn that the process is underway. At the hearing, the court will examine evidence about the nature of the debt, the company's affairs and cash flow, and the likelihood of the debt being repaid. If the court decides that the business is unlikely to be able to pay the debt, or is not satisfied that directors have made every effort to meet the demand, it can issue a winding up order. This triggers the compulsory liquidation process and means that the company’s assets will be sold off to repay creditors, after which a licensed insolvency practitioner will close down the business.

Because the outstanding winding up petition is advertised in The Gazette, the court hearing may attract evidence from other creditors. As such, you will need to present a strong case at the hearing to avoid the closure of your business. If you believe your company is at risk of closing as a result of a winding up order despite being viable, it is important to take urgent action when you receive a winding up petition. Advice from the team at JMW can help you build a strong defence to present at the court hearing, and may enable you to pursue informal ways of resolving the debt.

What happens when a winding up petition is advertised in The Gazette?

There are several potential consequences for a business when a winding up petition is granted and becomes public knowledge. The company's bank accounts may be frozen once the petition is advertised - banks often freeze accounts to prevent assets being dissipated and this is a particular risk when a company is facing a winding up order.

Suppliers and customers may pull out of relationships due to concerns about the company’s viability, and this loss of confidence in the business can create a quick spiral towards liquidation. Options like company voluntary arrangements and administration may be harder to agree, which reduces the potential rescue options that are available.

It is important to say that a winding up petition should only be considered as a last resort, when a creditor believes they have exhausted all other ways of recovering the money they are owed. As such, there are several important options that an insolvent company, or any business with cash flow concerns, should pursue before the dispute reaches this stage. Professional advice can help to recover a business in some cases, but only before the court sets the liquidation process in motion.

What happens during compulsory liquidation?

If the court grants a winding up order, a company is placed into compulsory liquidation and an official receiver is appointed to manage the winding-up process. Usually a licensed insolvency practitioner is later appointed, and if the business has been working with a private sector practitioner the court may appoint the same person, provided the creditors approve.

The official receiver will close the company and sell off company assets to release funds with which to pay its debts. Once they have realised the assets, they will distribute the proceeds to the creditors in a specific order: beginning with secured creditors, then preferential creditors, unsecured creditors, shareholders and others.

For this reason, it is not always a sensible financial decision for a creditor to issue a winding up petition. If the business does not have sufficient assets to cover its liabilities to secured creditors, unsecured creditors may not receive the full value of their debt. However, there are other approaches beyond the statutory demand that can deliver better results in some circumstances.

Once the company has been closed and dividends distributed, a final report will be presented to a meeting of creditors by the official receiver. Upon receiving a copy of the report, Companies House will remove the business from its register and it will be deemed to no longer exist.

How can you defend against a winding up petition?

There are several strategies a company may use to prevent or respond to a winding up petition, but decisive action is needed. The most straightforward way is to settle the debt before the hearing date, which can lead to the petition being withdrawn. This can help the business avoid any reputational harm that could come from advertising the petition, but it often demands that the business raise funds or investment to cover the debt.

If this is unlikely to be an option, but the business remains viable, it may be possible to agree an informal payment plan with a creditor. Many creditors will be open to accepting smaller payments over a longer period, especially if the company demonstrates a genuine intention and ability to repay. If a formal agreement is reached, the creditor can agree not to proceed with the petition. However, once the petition has been advertised, other creditors can potentially intervene and take over the petition if they are also owed money.

When an informal arrangement is not possible, a Company Voluntary Arrangement (CVA) may be a viable option. A CVA is a formal agreement between a company and its creditors to repay debts over time. If a CVA is proposed and has a reasonable chance of approval, the debtor can apply for a stay of the winding up proceedings while the CVA is considered.

For a debt that is not disputed, a final option is to enter administration. When a company cannot reach agreement with the creditor or dispute the debt, it may choose to appoint an administrator. This places the company under the control of a licensed insolvency practitioner and triggers a moratorium that halts all legal actions, including winding up petitions. This can give the company time to restructure or sell the business.

Can you dispute the debt?

In some cases, there may be genuine legal objections to the demand based on a dispute over the amount that is owed or the terms of the agreement between the parties. For example, a company can oppose a winding up petition on the basis that the debt is genuinely disputed on substantial grounds. This applies if the company believes that the amount claimed is incorrect, the goods or services were not delivered as agreed, or there is a valid cross-claim that reduces or negates the debt.

Courts generally do not permit a winding up order where a genuine dispute exists. The company must file evidence (usually a witness statement) setting out why the debt is disputed and attend the hearing to present its case. If a company intends to dispute the petition, it can apply for an injunction to prevent the petition being advertised. A granted injunction protects the business’s reputation and buys time to resolve the issue without immediate disruption.

Can I fight a winding up petition in court?

The court hearing is your opportunity to prove that a court order to wind up the business is not necessary. For example, a company may be able to persuade the court that it is solvent and able to meet its debts as they fall due. This could involve producing recent financial statements, bank statements, or letters of credit. The court may consider this evidence when deciding whether to grant the petition, particularly if it appears the petition has been filed abusively, which is sometimes the case.

As always, timing is critical and you will have the best chance of success (and the biggest range of options) if you act quickly. Once a winding up order is granted by the court, the company enters compulsory liquidation, and there are few options for reversal. However, there are several steps you can take before this point to resolve the matter.

Seek legal advice as soon as a petition is threatened or served. The team at JMW can help you to assess the strength of any available defences and advise you on whether there is scope to dispute the petition. A winding up petition is a powerful tool used by creditors when all other recovery options have failed, but it does not always mean the end for a business.