Winding up petitions are furloughed!

Winding up a company – liquidation – applies in circumstances where a company is unable to pay its debts. In that situation, the company's directors, creditors or contributories can present a winding up petition. (This can be found in sections 122, 123 and 124 of the Insolvency Act 1986.)

A company is deemed unable to pay its debts if:

(1) it owes more than £750 to a creditor and a written demand has been served requiring payment to be made within three weeks - but the company has failed to do so (this is commonly referred to as a statutory demand);

(2) the induciae -the time limit given - of a charge for payment on an extract decree has expired without payment being made; or

(3) it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.

A company will also be deemed to be unable to pay its debts if the value of the company’s assets is proven to be less than the amount of its liabilities.

Court winding up procedure

In Scotland, winding up petitions can be presented to the Court of Session in Edinburgh or, if the share capital is less than £120,000, to the local Sheriff Court in which the company's registered office is located. Once the court has considered the petition and is satisfied that the company is unable to pay its debts as they fall due, first orders for service and advertisement will be issued. The petition is then served on the company (usually by recorded delivery post at the company's registered office) and advertised in the Edinburgh Gazette.

The company (or any other interested party) has a period of eight days to lodge answers. If answers are lodged, a hearing will be fixed by the court to determine whether the winding up petition should be granted. Alternatively, if no answers are lodged and payment of the debt is not made, the petitioner will return the papers to the court and ask for the winding up order to be made and for the interim liquidator to be appointed. The matter will not call in court. In Scotland, there is no official receiver, and instead an insolvency practitioner will be appointed to act as interim liquidator.

If a company has lodged a caveat with the relevant court, this will be triggered on the lodging of any petition, which means that the court will give advance notice before granting an interim (immediate) court order.

The interim liquidator’s appointment is effective on the granting of the court order and directors will no longer be responsible for the running or management of the company. Once a company enters into liquidation, there is no mechanism in the 1986 Act, which allows the order to be recalled. As a result, the company will always be in liquidation.

Provisional liquidator

Depending on the nature of business of the company being wound up, consideration will need to be given to the appropriateness of seeking the appointment of a provisional liquidator. Provisional liquidators are granted specific powers by the court to allow them to carry out their function - in particular, to continue to trade and buy and sell on behalf of the company. When seeking the appointment of a provisional liquidator it is good practice to set out the specific powers needed by the provisional liquidator in the petition.

The function of a provisional liquidator is to safeguard the business and assets of the company, pending the decision of the court as to whether it is appropriate to wind up the company. In order for a provisional liquidator to be appointed, the court will have to be persuaded that this will be to the benefit of the general body of creditors.

The liquidator

An interim liquidator is appointed by the court, but their appointment has to be approved by majority at a creditors' meeting, otherwise an application to court is needed.

Once all assets have been identified and distributed, as a terminal procedure, exit from liquidation is completed via dissolution and strike off. There is no set period prescribed for the term of a liquidator's appointment -it can run for years.

Preventing a winding up petition being lodged

If a caveat is triggered, the court will fix a hearing at which the affected company can address the court, before any order is granted for service or advertisement. While not a guarantee against the petition being served or advertised, it does provide the chance to settle the debt before the petition is advertised.

The effect of COVID-19

COVID-19 has impacted on the way in which winding up petitions are used currently – in fact it would be fair to say that the UK Government has, in a sense, furloughed the procedure to provide some breathing space to struggling companies. The Corporate Governance and Insolvency Act 2020 came into force on 25 June 2020 and contains provisions that significantly limit a creditor's ability to wind up a company.

The Act:

1. Stops a winding up petition from being presented to court on the basis of a statutory demand, where that demand was served between 1 March 2020 and 30 September 2020 – known as the relevant period.
3. Restricts a creditor from presenting a winding up petition during the relevant period unless a creditor has reasonable grounds for believing that:
   1. Coronavirus has not had a financial effect on the company, or
4. the situation that the company is in would have happened even if coronavirus had not had a financial effect on the company.

So far, all creditor challenges to these restrictions have failed.

Expiry of winding up restrictions

The restrictions described above should only be in place until 30 September 2020, but given the enormous impact that the pandemic is having on all aspects of life, it is possible that this date may be extended.

If that happens, it is likely that we will see more petitions brought by creditors and further challenges to the restrictions being taken - or arguments that a company's financial difficulties have not been caused by coronavirus.