What Are The Consequences Of A Winding Up Petition?

A winding up petition is when a creditor, who is owed more than £750, petitions  the court to liquidate the company as they believe the company is insolvent. The consequences of such a petition can be very serious.

The time left to help the company will be reduced

Once a petition has been served on a company, a court date is set for the hearing, usually six to eight weeks after.  This immediately puts time pressure on the directors of the company to either reach a settlement with creditors, restructure their debts or raise new finance.  No banks or loan providers will lend to a company with a winding up petition, so any funds will have to come from elsewhere.

Banks will freeze the account following a petition

When a winding up petition has been advertised, your bank will hear about it as it is published in the London Gazette. Following this they will freeze your bank account. This is because any transaction after a winding up petition has been served can be reversed by the court.  Consequently, no more payments can be made from or into the account causing serious problems for the company. The bank account can be opened again but only if a validation order is obtained.   In addition, the credit rating of the company will weaken to zero.  Once the petition is advertised other creditors may “piggy back” onto it and add their claims. This results in more claims against the company.  Consequently, in order to settle the petition, you then have to settle with all other creditors.

Legal action

The company will have to cover any related expenses and inconveniences in dealing with the petition itself. For example, working with solicitors or having legal advice on the petition. If the petition leads to a winding up order the company will be obliged to pay the petitioner’s costs of the petition as well as the petition debt itself.

Additional effects of a winding up petition

Following the advertisement of the petition in the London Gazette, your company is at risk of (in addition to those above):

• Staffing issues
• Reputational damage
• Lease terminations
• The appointed liquidator takes control of the company and its business affairs. This means that the company directors completely lose control

What if the winding up petition is not advertised or has been paid?

Even if the winding up petition is not advertised, and perhaps even paid, it can take up a lot of management time.  If the company is a household name, the petition will appear on court papers and reporters are known to look through the lists without fully understanding the process.  It is also the case now that certain credit rating agencies have direct access to the Companies Court Database. Consequently, they know almost immediately the petition is filed at the court.  It stays on the record until an order to dismiss or withdraw has been filed at the court and the credit rating agencies update their systems.  This can take some weeks.

What can be done to stop a petition being served in the first place?

Notwithstanding the financial state of the company, the most important thing is to face up to the challenges the company has and try and engage with creditors (don’t ignore them). Most importantly you should seek independent professional advice and assistance to try and stop a winding up petition being served.

Scottish Winding Up Petitions

In Scotland, the consequences are more serious as the moment the petition is lodged it is “walled” at the court i.e. put on public display in the court offices.  The banks can then read this and freeze the accounts.  It is possible to get a caveat in the Sheriff’s court to stop the petition being “walled”.  This would need to be done through a lawyer.  Ask us about this

In Conclusion

In the end if you ignore a winding up petition the will mean that the court will issue a winding up order and the company will be put into compulsory liquidation.  That will be the end of the company and there may be personal repercussions if you have personally guaranteed any debts. So talk to your creditors and don’t bury your head in the sand!

What options does a company have if a winding up petition has been served

So, assuming you haven’t been able to stop the petition and it is valid there are a few options available to you.

• Pay the creditor. This will mean the petition will be heard but dismissed.
• If the above is not possible then you will need to consider asking the judge for an adjournement to allow yourself time to formulate a rescue plan.  A time to pay plan or a company voluntary arrangement could be proposed if the company cannot raise additional capital.

Read more about these rescue options

If you have had a winding up petition against you, seek expert advice. Call one of our team today on 0800 970 0539.