Winding-up petitions, otherwise known as ‘Compulsory Liquidation’, are an important tool available to individuals or companies as a means of debt recovery when debts of £750.00 or more remain unpaid. Whilst they can be a highly effective method of debt recovery in circumstances where the debtor does not dispute the debt and has the means to pay, it is important that the associated costs and risks are understood before embarking on this course of action.

The petitioner will be required to pay a court fee, which currently stands at £332.00 and an Official Receiver’s deposit at £2,600.00. The deposit is an amount paid as a contribution towards the costs of the Official Receiver which will be appointed by default if the Petition is granted. Whilst it is possible that this may be recovered if there is enough money left in the liquidation, there is no guarantee that any refund will be received. If the Petitioner is instructing a solicitor to do the associated work then the cost of this advice will also need to be factored in.

The petition must state the relevant ground that the petitioner is relying upon. Section 122 (1) (f) of the Insolvency Act 1986 (“the Act”) sets out the most common ground, which is that the company is unable to pay its debts.

Section 123 of the Act sets out the four ways in which the petitioner can show that a company is unable to pay its debts, which are as follows:

·           Section 123 (1) (a): the creditor is indebted in a sum exceeding £750.00 and has served a written demand (‘Statutory Demand’), requiring the company to pay the outstanding debt, and the company has failed to do so to the creditor’s satisfaction. The company is limited to three weeks in which to discharge the debt.

·            Section 123 (1) (b): a Court has issued a judgment against the company which has gone unsatisfied.

·            Section 123 (1) (e): the company is unable to pay its debts as they fall due. This is known as the ‘cash flow test’.

·            Section 123 (2): the company’s assets are less than its liabilities. This is known as the ‘balance sheet test’.

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In most cases, the petitioner will rely on section 123 (1) (e) as the standard of proof required for this test is relatively low. The simple fact that the company has failed to discharge the debt is often evidence enough of its inability to pay. It is therefore prudent to keep a record of all communications with the company, especially anything concerning late payment. It may be that the company has indicated that it is having cash flow issues or even admitted that it cannot pay. However, some debtors are adept at taking steps to spuriously dispute the debt, such that this route will no longer be appropriate (the Court will not issue a winding-up petition in circumstances where the debt is disputed).

Once the petition has been filed and served, it will then need to be advertised in the London Gazette. This is the point at which the company will be under pressure since alerts will likely be triggered at their bank which may in turn, trigger a default under facility agreements. There is a risk that following service of the winding-up petition, the debtor will make an application to the Court to restrain advertisement on the basis that there is a dispute and seek to recover its costs from the petitioner. However, this potential hazard can be mitigated by sending the petition in draft to the debtor essentially putting them on notice that should they not discharge the debt then the petition will be issued without further notice. This can also flush out any dispute regarding the debt.

Once the petition has been processed by the Court, the matter will then be listed for a hearing of the petition. The Court maintains a discretion as to whether it makes an order for winding-up or not (section 125 (1)). The Court may decide to dismiss the petition, adjourn the hearing, make an interim order or make any other order as it thinks fit.

Should the Court make an order for winding-up, an Official Receiver will be appointed by the Court as the liquidator of the company. They are civil servants and officers of the Court. Their job is to essentially collect the assets of the company, realise them, and then distribute the proceeds in the following order, this is called the ‘Statutory Order of Creditors’:

·            Secured creditors with a fixed charge: creditors whose debt is attached to a specific asset such as property.

·            Priority pre-moratorium debts and moratorium debts: where the company has entered a moratorium (a break from paying its creditors) and then enters into liquidation within twelve weeks of the end of the moratorium.

·            Liquidator: fees and expenses.

·            Preferential creditors: specific creditors which have been granted a higher status than they would ordinarily such as employees of the company.

·            Secondary preferential creditors (to include HMRC for certain taxes).

·            Secured creditors with a floating charge: creditors whose debt is attached to an asset that changes over time such as stock. It is worth noting that floating charges made in the twelve months prior to the insolvency date are void once the liquidator has been appointed.

·            Unsecured creditors: creditors including other HRMC debt who are owed money, but the debt is not attached to an asset.

·            Shareholders: these are only paid once all the higher-ranking creditors have been paid in full.

Creditors also have the option to replace the Official Receiver and put in place an Insolvency Practitioner of their own choosing.

It is important to bear in mind that the petitioning creditor, who has thus far already paid the court fee and the Official Receiver’s deposit, may not be able to recover any of these fees (or their solicitors’ costs) once all the funds have been distributed. Recovery of costs is dependent on whether there is any surplus following the distribution.

The downside to the winding up procedure is that it is a is lengthy, complex process and can be costly, so it is crucial to have the correct guidance throughout. Whilst at first blush a winding up petition may seem appropriate, tactically there may be more effective ways forward depending on the assets of the debtor company. If you are a creditor in need of advice, please get in touch with our commercial dispute resolution team on 01254 828410.

Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.