One of the government’s first moves to help businesses at the start of the pandemic was to ban the use of Winding Up Petitions by creditors to enforce outstanding debts. Now that we are starting to emerge from the worst of the crisis, that protection has been stripped away, at least in part.
As from 1 October 2021, creditors can once more serve a Winding Up Petition to recover unpaid bills, but subject to certain restrictions. Until 31 March 2022, this procedure can only be used for debts of £10,000 or more and not at all in respect of unpaid commercial rent. There is a ‘cooling off’ period of 21 days to facilitate negotiations between the creditor and the debtor company before the full WUP process can be progressed.
It is not yet known whether these arrangements will be revised or the restrictions removed after the end of March 2022.
What is a Winding Up Petition (WUP)?
A Winding Up Petition is a legal action taken by a creditor against a company that owes them money. The petition asks the court to wind up the company, so that a Liquidator can take control, realise its assets and distribute the proceeds to the creditors after costs and in accordance with certain priority rules.
This is an expensive option for creditors and is generally considered to be a last resort only used when all other attempts to get settlement of the debt have failed. The courts frown on the process being used just as a debt recovery process, intended to pressurise debtors into settling what may be genuinely disputed bills. Creditors have been heavily criticised for taking this approach, but the reality is that if a company receives notice of an impending WUP it is a very serious matter.
The issuing and advertisement of a Winding Up Petition can lead to the company’s bank accounts being frozen, while suppliers may with draw credit facilities or refuse to do business with the company at all, making its existing problems worse still.
What is the pre-petition cooling off period
In order to issue a Winding Up Petition, a creditor must now first deliver a written notice to the debtor company stating that the creditor is seeking the debtor’s proposal for the payment of the debt and that if no ‘satisfactory’ proposal is made within 21 days of the date of delivery of the notice they intend to proceed with serving the petition.
Unfortunately, the law creating this new process does not define what is or is not a ‘satisfactory’ proposal, which seems to be a decision left to the creditor alone and without any requirement for further negotiations about the debt. All the creditor has to do is to explain their decision to reject the proposal to the court at the hearing of the Winding Up Petition. It will remain to be seen how courts will interpret these arrangements.
What is the overall Winding Up Petition process?
Essentially, once 21 days have passed since the cooling off notice was delivered and the debtor has not made a satisfactory proposal for the payment of the debt, the creditor can commence the procedure by issuing the Winding Up Petition and serving it on the debtor company.
It is then advertised seven working days later in The Gazette and will be heard in due course at court, where it is either dismissed or approved. Once advertised, other creditors may support the petition, and if the original petitioner is paid or decides to withdraw, may take over the petition.
If the petition is approved by the court, the Winding Up Petition will be made and the debtor company immediately goes into Liquidation. This process is called Compulsory Liquidation.
The debtor company will be served with the order and the Official Receiver (an official who is part of the Insolvency Service) automatically becomes the Liquidator. Creditors may replace the Official Receiver by a private sector Liquidator of their choice, but only if 50 per cent of creditors by value ask for this or 10 per cent of them request a creditors’ meeting to appoint another Liquidator.
If you are concerned about the risk of creditors issuing a Winding Up Petition or you have been issued a Winding Up Petition, we are here to help. Our ethos is to listen, understand and offer solutions. If you would like to have a confidential, non-obligatory chat with one of our Partners, about your business, please contact one of our Partners at your nearest office.