What is a winding-up petition and is it as serious as it sounds?

Just like in other circles, a little knowledge in the insolvency and company closure world can be a dangerous thing, so quite apart from an analysis of what the government’s second stay on winding-up petitions means, let’s simply ask:

What is a winding-up petition, and is it as serious as it sounds?

Here, I will provide the answer, in what will be part one of a four-part series of explainer articles, covering various insolvency-based issues affecting limited company contractors, exclusively for ContractorUK, writes Gareth Wilcox, partner at Opus Restructuring and Insolvency.

So to repeat, ‘What is a winding-up petition and is it as serious as it sounds?’ The one-word answer to this is ‘yes.’ 

A winding-up petition is a document submitted in connection with an application to court for a limited company to be placed into compulsory liquidation.

Who serves or presents a winding-up petition?

A petition is submitted to court (with a fee) and returned to the petitioner, who must then serve it either in person, by attaching it to the company’s front door or leaving it at the registered office, if the petition cannot be served in person. A creditor must certify that this has been done, so many engage the services of a process server.

Most winding-up petitions are presented by a creditor who is owed money, although they can be presented by other parties including directors and shareholders, or the Secretary of State if it believes it to be in the public interest (usually where there are allegations of fraud). By far the most common petitioner in ordinary (non-pandemic) times, is HM Revenue & Customs.

If a winding-up order is made, a liquidator is appointed and all assets of the company (including cash) immediately vest in them, to be sold for the benefit of creditors. At the same time, all contracts (including employment ones) are severed and the powers of the director cease, Although contractors be aware -- their statutory duties do not. 

With a petition, who is the Official Receiver and what conduct must they consider?

Ordinarily, the liquidator will be the ‘Official Receiver’ (a civil servant employed by the Insolvency Service), in the first instance, unless the court orders that another Insolvency Practitioner (IP )be appointed.

In certain circumstances, the Official Receiver will pass a case they are dealing with to another IP, ordinarily if there is complexity or urgency. Or if a majority of creditors request it.

An appointed liquidator (whether the Official Receiver or otherwise) will have a duty to investigate the circumstances leading up to the insolvency of the company and consider action against the directors for any of the following:

• Unfair Preferences (this means where the director of an insolvent company treats one creditor – including themselves - better than others);
• Transactions at Undervalue (this means where company assets are transferred for no, or minimal consideration);
• Wrongful Trading (this means where a company has continued trading and incurred additional losses when the director ought to have known liquidation was inevitable);
• Misfeasance (this is the term for breaches of a director’s duties to the company).

What are the risks for directors before a hearing?

Even before a hearing, the consequences of a winding-up petition can be serious.  Before it is heard in court, the petition will be advertised in the London Gazette, which will bring it to the attention of the company’s bank, which will ordinarily respond by freezing the bank account. This is done to ensure any credit balances are preserved for any liquidation proceedings and prevent any overdrawn balances from increasing.

Clearly, the freezing of a bank account will prevent any business from continuing to operate without external funding, so it is crucial for any trading business to engage with a petitioning creditor to try and delay an advert being placed. Ordinarily, this will form a part of settlement negotiations with the petitioner.

Another lesser-known provision for contractors to be aware of is Section 127 of the Insolvency Act 1986. This provision provides that: "In a winding-up by the court, any disposition of the company's property, and any transfer of shares, or alteration in the status of the company's members, made after the commencement of the winding-up is, unless the court otherwise orders, void."

When is the date of commencement on a winding-up petition?

Typically, when a winding-up order is made, the date of ‘commencement’ is backdated to the date that the petition was presented. However, please note that one of the provisions of the Corporate Insolvency and Governance Act 2020 (CIGA) is that commencement is the date of the winding-up order (while CIGA remains in force).

This means that if a winding-up order is made, any transaction carried out by the company after the petition is presented (or during CIGA, when an order is made) is retrospectively deemed as void, unless a court subsequently validates it.

This can enable a liquidator to recover payments made to creditors even if they had no knowledge of the petition/order. However, it is designed to prevent a director from concealing or misapplying assets when they know a liquidation is on the way.  Whether a validation order can be obtained is heavily dependent on circumstances, so any person receiving a request to return void property dispositions should take legal advice as soon as possible.

What to do as a director if you’ve received a winding-up petition? 

In summary, winding-up petitions can have serious and wide-reaching consequences.

A director is duty-bound to cooperate with a liquidator’s investigations, and there can be serious sanctions (ultimately resulting in imprisonment), for failing to do so.

Any director receiving a winding-up petition should act quickly, and ensure they take the appropriate advice from a solicitor and/or an IP, particularly if they wish to save the business. 

Even if a company has already ceased trading and the director is minded to let the petition take its course, there may be matters (such as overpaid dividends or recoverable director’s loans) which ought to be discussed and considered before reaching this conclusion.

Most Insolvency Practitioners (myself included) will offer a free no-obligation discussion with directors who are concerned about impending winding-up proceedings. With the CIGA provisions due to end on September 30th 2021, this year’s fourth quarter is likely to see a large upturn in petitions, particularly with HMRC restarting its recovery activities as pandemic restrictions get lifted.