A winding up petition (WUP) is a legal process taken by a person or company ( owed money – the creditor) against a company (the debtor) who claim , owes them money and is not paying their debts.
If the creditor’s action is successful , then the debtor company is either forced into Compulsory Liquidation which means that they need to cease trading OR they can defend their case.
The debt outstanding must be over £750 for a WUP application to be made.
Issuing a WUP
So firstly, to serve a WUP an application to Court needs to be made. A creditor will need to show the Court that the debtor is unable to pay their debts for the application to be successful.
This is normally done by way of the creditor serving a statutory demand ( SD) on the debtor and then allowing them 21 days to pay the debt following service.
If the debtor fails to pay the debt or they do not dispute the SD after it has been served on them, this will act as evidence that the company is unable to pay its debt. The creditor can then commence with an application to the Court for a WUP.
In some cases, a creditor can start their WUP application at Court without first having issued a SD IF they have sufficient evidence of the debtor’s inability to pay their debts as and when they fall due.
If the Creditors application is approved by the Court, then a WUP will be issued against the debtor and the Court will list a hearing date that is typically around eight weeks from the date the petition has been issued. However, in the pandemic these timescales were frozen and there was temporary hold on anyone instigating proceedings for WUP’s.
In this eight-week period the WUP is formally served on the debtor and is also advertised. The rules governing the advertisement of the WUP ( The Insolvency (England and Wales) Rules 2016) stipulate that it must be advertised in the London Gazette seven days after it has been served on the debtor.
The automatic result of this advertisement alerts most if not all the financial institutions and so ALL bank accounts of the business will be frozen.
The advertisement can also lead to other creditors being made aware of the WUP and so they may also come forward to support the issuing of the petition
A decision is then made at the Court hearing to issue a Winding up Order for the company to be placed into Compulsory Liquidation.
What should you do if a SD or WUP is made against your company?
You should have systems in place so that if a SD or WUP is issued then they are dealt with ASAP. If you bury your head in the sand, then it can have devastating consequences for your business and if you have personal guarantees then these will also be affected at a later stage once the business is in liquidation.
Some of the problems which could arise in NOT dealing with the SD or WUP are :-
- Company bank being frozen
- Reputational damage for the company
- Bad credit and so the affect would be the company being unable to secure credit from its suppliers
- Other creditors starting to get worried and aggressive
- It could also impact existing commercial contracts which include clauses that permit for the agreement to be terminated if insolvency proceedings are commenced.
If a business is issued with a SD or WUP in respect of a debt that is not disputed, then it should be paid off as soon as it can (preferably prior to the WUP being advertised in the London Gazette) or enter negotiations with the creditor for a payment arrangement.
Once the debt has been paid off or an agreement has been reached, the debtor must ensure that the creditor withdraws the petition (with the permission of the Court) or that it is dismissed at the hearing, and preferably, that it is not advertised in the London Gazette.
However, even if the debt has been paid in full, the Court will not dismiss the WUP if a different supporting creditor has come forward and taken conduct of the petition.
In such instances, the Court will substitute the supporting creditor for the original creditor, if the supporting creditor would independently have had the right to present a WUP against the debtor.
However, if the debtor disputes any of the debts alleged by any creditors, they will need to defend the WUP.
Challenging or defending a petition
If there is a dispute in respect of the debt, then the debtor will need to defend the WUP. This can be done if there is a genuine disagreement as to whether the debtor owes the creditor money, or if the debtor is able to set off the debt, which would cancel out the amount owed to the creditor, or, alternatively, would reduce it to less than £750.
To provide that there is a genuine disagreement in respect of a debt, the debtor will need to provide the Court with sufficient proof and documentary evidence that they are not liable to pay the debt.
Once a debtor becomes aware of a WUP, it should write to the creditor to confirm that they are disputing the debt and take advice immediately.
The debtor should request that the creditor does not proceed any further with the WUP but should the creditor refuse to do this, then the debtor should either attempt to obtain an injunction to restrain the WUP notice being advertised in the London Gazette, or inform the creditor that they will oppose the petition at the Court hearing on the basis that they are disputing the debt.
The insolvency legislation is very complex and so advice should always be sought as soon as possible.
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