Previously in our insight titled ‘Winding-Up Petitions – the pros and cons’ (see: https://www.fmgs.co.uk/post/winding-up-petitions---the-pros-and-cons), we explained the winding-up procedure from the creditor’s perspective and the associated risks. In this insight, we will discuss the various steps a company might take when served with a winding-up petition and the ways in which it may prevent a winding-up order being made.

The first thing to note is that time is of the essence, this is a crucial point as once a petition has been served, the company only has seven working days to respond before the petition can be advertised in the London Gazette by the creditor. Once the petition has been advertised, it is then public knowledge that a creditor has commenced winding-up proceedings against the company which can have a negative effect on the company’s reputation, its ability to obtain credit, and can result in the company’s bank account being frozen. In addition to this, once a winding-up petition is issued, any disposition of property (i.e. a sale of shares) will be void. Therefore, it is vital that the company seeks legal advice immediately after receiving a petition.

The next step is for the company to consider its options and the best way in which to deal with the petition. If the company does nothing, then a hearing will be listed, and the court will consider the petition and whether to issue the winding-up order. If the company does not attend the hearing to contest the petition, then it is likely that a winding-up order will be made.

In order to prevent a winding-up order from being made, there are several grounds which the company may rely on. The most common grounds are (a) there is a genuine dispute over the debt; or (b) the company has a right of set-off or cross claim that exceeds the amount of the debt, or it would reduce the debt to less than £750 (the minimum amount required to bring a petition).

A ground which is commonly used  by companies is that the debt is disputed on substantial grounds. The reason for this is because deciding a winding-up petition on a disputed debt is not a matter to be determined by the Insolvency Court and instead, the dispute should be considered in the County or High Court depending on the value of the dispute. If the debt is disputed, then the company should first set out the reasons for the dispute and request an undertaking that the petitioner will not serve a notice pursuant to rule 7.10 of the Insolvency (England and Wales) Rules 2016 (“IR 2016”) (this is the same as advertising in the London Gazette mentioned above). If the undertaking is not given, then the company can apply to the court for an injunction restraining the petitioner from serving a notice.

Another common ground is that the company has a right of set-off/cross claim against the petitioner. It may be the case that the petitioner owes money to the company and if that money is paid, then the value of the company’s debt to the petitioner is reduced or discharged entirely. The court will need to be satisfied that there are substantial grounds for a cross claim in the same way as where there is a disputed debt. If the court finds that there is a right of set off or cross claim, then the court will either dismiss the petition or adjourn the hearing to determine the cross claim.

To oppose a winding-up petition, the company must file and serve a witness statement not less than five working days before the hearing. As mentioned above, a representative of the company needs to attend the hearing in order to contest the making of a winding-up order. As touched upon in our previous insight, the court may decide to dismiss the petition, adjourn the hearing, make an interim order or make any other order as it thinks fit.

Following the hearing, if the court decided to dismiss the petition, the company can generally recover their legal fees from the petitioner. If it is deemed that the creditor bringing the winding-up petition was an abuse of process (i.e. because the creditor was aware that the debt was genuinely disputed), the court may order that the costs are awarded to the company on the indemnity basis, meaning that the court will resolve any doubt it may have in favour of the company so long as the costs sought are reasonably incurred and reasonable in amount. However, there is no requirement for costs to be proportionate. Essentially, costs on the indemnity basis will be more than if they were awarded on the standard basis (which requires the costs sought to be proportionate in relation to the financial position of the parties; the value of the debt; and the complexity and importance of the matter).

Alternatively, if a winding-up order is made, the company has the following options in which to prevent, or at the very least delay, the winding-up of the company:

1.         Rescission;

2.         Stay of winding-up proceedings; or

3.         Appeal.

Rescission is where the winding-up order is revoked, which has the effect of cancelling the order so the company can continue to trade. The procedure for rescission starts with a creditor, a contributory or a combination of the company and either a creditor or a contributory, making an application supported by a witness statement to the court within five working days following the winding up order. The witness statement must include details of the company’s assets and liabilities.

The company can also seek a stay of proceedings which pauses the proceedings for a certain amount of time and allows the company to continue to trade. The application must be made by either a creditor, contributory or the liquidator of the company. It is worth noting that the court maintains a discretion as to whether a stay will be granted. The court will consider the solvency of the company and whether it is in the public interest to grant a stay. The downside to a stay of proceedings is that the winding-up order still exists even though the company is able to trade as normal. This may act as red flag to third parties and deter them from doing business with the company.

Finally, the company can appeal the making of a winding-up order. An appeal may be granted if the court finds that the decision to wind up the company was wrong or unjust because of a serious procedural or other irregularity in the proceedings in the lower court, pursuant to rule 52.21 of the Civil Procedure Rules. The company must first obtain permission to appeal from the court where the winding-up order was made or, from the court which has jurisdiction to hear the appeal (pursuant to rule 12.61 of the IR 2016). Once permission has been granted, the company must serve a notice within 21 days at the designated appeal centre for County and High Court appeals or the Civil Appeals Office if the appeal is to be heard in the Court of Appeal.

Being served with a winding-up petition is an extremely serious matter and the reality of the situation is that irreparable damage will be done, which means that if the winding-up order is made, the company will not survive. If your company has been served with a winding-up petition or has been threatened with winding-up proceedings, and you are in need in advice, please get in touch with our commercial dispute resolution team on 01254 828410.

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