What is a winding up petition when closing a company?
Author
Shaun Barton | Company Closure Expert
Last Updated:
What is a winding up petition?
A winding up petition is a legal document used by creditors to close down a company that’s unable to pay its debts. Typically a measure of last resort for a creditor, it commonly leads to compulsory liquidation if the petition is accepted by the court.
Creditors must be owed £750 or more before they can petition to wind up a limited company, but if the petition is successful the court will grant a winding up order to start liquidation proceedings.
So what happens next for the company and does it signal an end to trading?
What happens when a winding up petition is served?
A key event in the winding up petition timeline is the placement of an advert in the Gazette. This officially notifies individuals and other businesses that the company is experiencing extreme financial distress. At this point, the business’s bank is likely to freeze the bank accounts to protect themselves against financial loss.
This can signal the end for the company being petitioned as it’s impossible to continue normal trade in these circumstances. Ultimately, if the court grants a winding up order, the process of forcibly closing down the business and liquidating its assets begins.
A considerable concern for company directors is that their actions leading up to insolvency are subject to investigation by the Insolvency Service to discover why the company failed and if director misconduct contributed to its failure.
If directors are found to be at fault they may be disqualified for up to 15 years and/or face personal liability for the company’s debts. In the most serious cases of fraudulent activity, a prison sentence can be handed down.
When is a winding up petition likely to be used?
Winding up petitions are typically issued after a creditor has served a formal demand on the company for repayment of a debt of £750 or more. The fact that the company doesn’t pay this demand serves as the necessary proof that the debt exists.
Winding up petitions are commonly issued by trade creditors, such as suppliers, HMRC, and the banks, and this method of closing down a company is generally used when a creditor has tried all other options but remains unsuccessful in recovering their monies.
Does a company always close down following a winding up petition?
Company directors have seven days from the date of the petition to prevent their company from closing so they need to act very quickly and seek professional insolvency help to challenge the petition.
There are four main avenues that could prevent closure:
- Pay the debt in full: by selling a business asset, for example, or obtaining business finance that provides a cash lump sum
- Negotiate a Company Voluntary Arrangement (CVA) if other debts exist: if the business owes multiple debts, a licensed insolvency practitioner may be able to negotiate with creditors for this official repayment plan
- Enter company administration: entering administration offers an eight-week ‘breathing space’ for a licensed IP to determine the best way forward for the company
- Dispute the debt by providing compelling proof: if the debt isn’t legitimate, has been repaid, or the amount is incorrect, an IP may be successful in having the winding up petition set aside
If you need to challenge a winding up petition or are concerned that a creditor may try to close your company in this way, Company Closure can help. We provide reliable independent advice and offer free, same-day consultations to quickly establish the best way forward.
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