Published on 10 December 2010 by Tony Groom
A Winding Up Petition (WUP) is a legal application by a creditor to the High Court or another appropriate court asking that a company be closed down.
The purpose of winding up a company is generally to remove control of a company from its directors so that its affairs can be dealt with properly. At the end of the process the company is dissolved and ceases to exist.
Compulsory winding-up is a legal process by which, if granted by the court, the official receiver is appointed to oversee closing down the company and may then engage a licensed insolvency practitioner as approved liquidator.
The petition must be properly served on the company, normally by personal delivery at its registered office, and must be advertised in the London Gazette. The advertisement is intended to notify the public but in practice is also how banks and other institutional creditors learn of the petition. The process of service and notice is complex and often petitions are rejected in Court when the petitioning creditor is unable to prove that the correct process has been followed.
Directors, on receipt of the petition, should be aware that when the bank learns about it may freeze the company bank account. They should also be aware that any further trading after the date of receipt may mean that they can be held personally liable for any company debts accrued after that date if, when their actions are investigated, they are found not to have acted in the best interests of the company’s creditors.
If the directors wish to continue trading in order to save the company then they should seek help from a business rescue adviser if the company is insolvent. If they believe that trading on would benefit creditors through recovering assets, then they should seek help from an insolvency practitioner who might well be introduced by the bank or another secured creditor. Whatever the reason for continuing to trade, trading while insolvent there are issues for directors who are advised to seek professional help.
Failure to respond to a petition can lead to a company being closed down. In view of the complexity of the process the directors should not try to deal with the petition without expert guidance from an insolvency, legal or business rescue adviser, who would normally introduce an insolvency barrister to represent the company in court. The need to use a barrister is because only two people have rights of audience in the winding up court, either a director or counsel acting on the company’s behalf.
Although the petition is very serious and should not be ignored it does not mean that the company is doomed to closure. With proper representation based on a credible plan to deal with the company’s difficulties it is possible to have a winding up petition dismissed.
For example, if the debt has been paid or if a Company Voluntary Arrangement (CVA) has been approved. It is not uncommon for the court to adjourn the petition hearing if the company can demonstrate that it is attempting to resolve the petition debt. Reasons for adjournment might be asking for time to pay the debt or for time to hold a meeting of creditors to consider proposals for a CVA. However only a few weeks will generally be granted.
Should the debt be disputed, the petition is not dismissed but instead it is adjourned pending judgement on the claim’s validity. It relies on written evidence with a date by which the defence must be provided to the court, the next date being when the claimant must have responded, then a date by when the court is to have considered the evidence from both parties. Following that the court will determine whether there is sufficient evidence for judgement or a hearing or a full trial.
A WUP is often used as an action initiated out of frustration following attempts by a creditor to agree terms for repayment of money owed or after repeated attempts to contact the company have been ignored. Some creditors use WUPs as a means of debt collection, which can work when a company pays before the hearing.
HM Revenue and Customs (HMRC) regularly uses the petition when its repeated written reminders and requests for repayment of outstanding PAYE, VAT or tax have been ignored but the petition can equally be used by private creditors.
Surviving a petition does not always mean that the company will survive. All too often companies pay the debt but leave themselves without sufficient cash to pay other bills or even wages. Sometimes directors use personal funds or their pension to pay the debt, but the debt has purely moved from one creditor to another where recovering it from the company remains a problem. Too often directors try to deal with a petition without advice, which is surprising given the high stakes involved.