Whilst most people would hope it could never happen to them, in our experience it often can. As such it pays to be prepared.

Unfortunately, we are facing a "perfect storm" of supply chain problems, a cost-of-living crisis and high interest rates that is increasingly impacting the ability of companies to pay their debts as they fall due. We all know that in terms of working capital requirements "cash is king", this means that creditors are often being less patient when collecting debts and moving towards more aggressive debt recovery options. On the ground this is translating into an increase in the number of statutory demands and winding-up petitions being served.

Why is a winding-up petition so serious?

If a winding-up petition (also known as liquidation proceedings) is successful it almost always spells the end for a company – the liquidation process has been described as giving a company a proper burial.

Once a company is wound up (or a provisional liquidator appointed), its directors relinquish control of the company to a liquidator, who has a duty to investigate the affairs of the company report on the conduct of the directors and also to report to the creditors on the progress of the liquidation. The ultimate role of a liquidator is to identify, collect, secure and protect the assets of the company, with a view to liquidating those assets and if possible, paying a dividend to the company's creditors.

Whilst you might think that as it's a court process you might have plenty of time to deal with a winding up petition – you really don't. Winding up proceedings are designed to be dealt with quickly. You should also not underestimate the practical problems which presentation of a winding up petition alone can have.

Where a petition is present a company may well find itself in breach of its covenants to its lenders. If you operate in a regulated sector, it may mean you find yourself in difficulty with your regulator. On receiving notice that a winding up petition has been presented it is standard practice for banks to freeze the company's bank accounts. In addition, suppliers and customers may also hear about the petition and take steps which adversely impact the company's business by refusing to provide products or services.

How do winding up proceedings start – demands and statutory demands?

It is most common for a winding up petition to proceed on the back of some form of demand.

A statutory demand is a formal written demand (in the prescribed form) for payment of a debt of £750 or more within 21 days. If it is not denied within the 21-day period, the company is deemed unable to pay its debts within the meaning of s.123(1)(a) of the Insolvency Act 1986 ("IA 1986"), allowing a winding up petition to be presented.

Inability to pay debts as they fall due can also be deemed if it is proved to the satisfaction of the court that a company cannot pay its debts as they fall due (s.123(1)(e) IA 1986). Often a creditor will seek to establish this by serving a letter demanding payment of a debt, on the basis that failure to pay the debt will be used as evidence of the company's inability to pay its debts as they fall due. These demands are often referred to as "short form" demands and can give the company as little as 48 hours' notice to pay the sums (allegedly) owing.

What to do if you receive a demand for payment?

If you receive service of a demand the first step is to ask whether this is truly a debt of the company, and if it is, whether the debt is due or whether it is disputed. If the debt is disputed and you have received a statutory demand you should complete Part A of the statutory demand (denying the debt in whole or in part) and returning it to the relevant party identified in the statutory demand.

If you receive a short form demand, and it is disputed, then it is good practice to formally deny that the debt is due and set out the reasons why it is disputed.

If the debt is due, the company needs to pay or make arrangement to pay the debt. If immediate payment is challenging perhaps due to short term cash flow issues, again, it is good practice to engage with the creditor to see if a time to pay arrangement might be available.

If the debt is disputed on bona fide and substantial grounds, the courts are very clear that a winding-up process is not the place to resolve such a dispute. As such the creditor ought not to present a petition as they cannot, until the dispute is resolved in their favour, say that they are a creditor of the company.

In Scotland - lodge a caveat

In Scotland, caveats should be lodged where there is any concern that a creditor may seek to bring winding up proceedings.

Caveats are uniquely Scottish and can be lodged at the Court of Session and at any Sheriff Courts (broadly equivalent to County Courts) on behalf of companies, individuals, firms, partnerships and trusts. They last for one year from the date of lodging and can be renewed every year for as long as required.

Wherever a caveat is lodged in the name of a party, the court must give that party's solicitor notice (although this may only be 24 hours or so) that the winding up petition has been presented and before it grants first orders (for intimation, service and advertisement) giving the party the opportunity to be heard so that the party has the chance to attend the hearing and oppose any orders being granted.

Without the caveat, no notice of the petition would be given and first orders could be granted, including the appointment of a provisional liquidator, without the company first having the opportunity to be heard. In terms of winding up proceedings, caveats can often be a very useful, immediate, first line of defence.

What other steps can I take?

If a petition has been presented and first orders granted, all is not lost. You can still lodge answers to the petition and contest the petition on the basis that the debt is disputed. That is likely to be costly and stressful experience given it will be for the court to determine whether the winding up order should be granted.

As they say, "prevention is better than cure" – given the ramifications of the presentation of a winding up petition efforts should always be taken to try and avoid the petition being presented in the first place.

Key message

The earlier you act, the more chance you will have of preventing the reputational harm that can accompany the presentation of a winding-up petition. If you have any questions about what to do following the threat of a winding-up petition, please contact Sarah Wilson, Lucy McCann or your usual Brodies contact.


Sarah Wilson


Lucy McCann