Occasionally an invoice slips through the net and does not get paid, or payment is delayed due to issues with the goods or services being provided.
Where the debt is for £750 or more, an impatient creditor may serve a statutory demand or a winding up petition if it considers there to be no reason for the delay.
If this happens, deal with the situation immediately as the consequences of failing to do so can be very damaging to the company's reputation and finances; even if it is not ultimately wound up.
To help you take appropriate action, we have pulled together some of the key questions and steps to consider.
1. What is a statutory demand / winding up petition?
A statutory demand is a formal demand for payment of a debt. If the debt remains unpaid and unchallenged for more than three weeks, it will constitute evidence that a company is unable to pay its debts and that the debt is undisputed. This evidence can then be used to support a winding up petition.
A winding up petition is a creditor's petition to have a company placed into compulsory liquidation by the Court, resulting in the company ceasing to trade and being wound up.
2. What happens once a winding up petition is served?
The creditor presenting the petition must advertise it in the London Gazette no less than seven days after serving it on the company concerned. If the debt is not paid within this time period, the advertisement will be put in the Gazette - which is closely monitored by the banks. Upon notice of the petition, the company's bank will normally freeze its accounts, potentially leaving the company without access to funds and unable to pay its other debts; even if it could have done so before. The company will also struggle to secure credit from its suppliers, and creditors may pursue outstanding debts more vigorously.
Also, many commercial contracts (including leases) can be terminated if insolvency proceedings are commenced - often including the presentation of a winding up petition.
It is also important to note that in the event that the Court does make a winding up order, any assets disposed of from the date of the presentation of the petition will be void and can be clawed back for the benefit of the company's creditors. This may be avoided by seeking a prospective validation order from the Court.
3. What if the debt is due?
If due, the debt should be paid (probably along with the petitioner's costs of issuing the petition) before the petition is advertised - i.e. within the seven days following service of the petition. In doing so, the company should seek to obtain a written undertaking from the petitioner that the petition will not be advertised or pursued, and will be withdrawn (with the permission of the Court) or dismissed at the petition hearing. If the company is able to pay some but not all of the debt, it should discuss payment options with the creditor, to see if an agreement can be reached.
Even if the original debt upon which the petition was based has been paid in full, the Court will not grant permission to withdraw the petition if it has been advertised or another creditor has given notice of support. Nor will it agree to dismiss the petition if another supporting creditor takes over conduct of it.
If only part of the debt is undisputed and due, that part should be paid and the balance of the petition opposed.
4. What if the debt is disputed?
If there is a genuine dispute on substantial grounds as to whether the debt is owed, or if the company has a cross claim or right of set off which would cancel out the debt, or reduce it to less than £750, then the petition must be challenged - and quickly.
5. How can the petition be challenged?
Assuming no formal steps have been taken prior to the presentation of the petition, the first steps are to notify the creditor of the grounds of dispute in as much detail as possible and to request an undertaking that it will not proceed with the petition. If this is refused, the company should either seek an injunction to restrain notice of the petition being advertised in the London Gazette or, alternatively, it may wait and simply oppose the petition at the petition hearing; although, by that time, significant financial and reputational damage may have occurred due to the advertisement of the petition.
The Court will grant an injunction where it is evident that the petition amounts to an abuse of process, or is otherwise bound to fail (for example, because the debt is genuinely disputed on substantial grounds).
6. What if an injunction is refused?
The petition must be challenged at the petition hearing itself. A witness statement in opposition that sets out the grounds upon which the petition is opposed must be filed at least five business days before the hearing. Grounds for opposition include, for example: (i) that the debt is disputed; (ii) there is a substantial cross claim; (iii) the English Courts lack jurisdiction; or (iv) the petitioner has failed to comply with the strict procedure set out in the Insolvency (England and Wales) Rules 2016.
If the Court is satisfied that the challenge is genuine, it will give directions for further evidence to be provided and direct that the matter be heard at a subsequent, longer hearing.
7. What if the petition fails?
If the petition is successfully challenged, the company will usually recover its costs of defending the petition on an indemnity basis. This means that the Court will: (i) allow costs that have been reasonably incurred or are reasonable in amount; and (ii) resolve any doubt which it may have as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party. The Court will also have regard to various other factors.
8. What if the petition succeeds?
If the petition is successful, the following takes effect:
- the official receiver becomes the liquidator of the company (and may subsequently be replaced by a licenced insolvency practitioner);
- the powers of the company's directors cease;
- the liquidator takes control of the company's assets;
- dispositions of the company's property from the date of presentation of the petition become automatically void; and
- all employees are automatically dismissed.
The liquidator's function is to realise the company's assets for the benefit of its creditors, pay off its debts using those assets (where possible) and investigate the company's affairs (including the conduct of its directors).
Once the liquidator is satisfied that the company's assets have been realised (so far as they can) and has distributed such realisations to creditors (where possible), plus the company's affairs have been investigated, the liquidator will apply for the dissolution of the company.
9. Can the winding up order be appealed?
Yes, but an appeal will only be allowed where the decision was either wrong or unjust because of a procedural or other irregularity.
In certain circumstances, the petition can also be rescinded or stayed by the company's creditors or liquidator.
10. What are the main action points to help deal effectively with a winding up petition?
- Have systems in place to ensure statutory demands and winding up petitions are flagged and dealt with immediately upon receipt.
- Do not ignore a statutory demand or winding up petition - it will rarely just go away and the Court can make a winding up order in a company's absence.
- Respond to the petitioner before the petition is advertised as the company's financial position and reputation will otherwise almost certainly suffer.
- Seek legal advice earlier rather than later.
To discuss any of the points raised here or any other dispute-related issues in the context of corporate insolvency, please contact Jason Freedman in the first instance. You can also sign-up here to receive further updates from our teams on other legal topics that might be of interest to your area of business and sector.