What do I do if….a creditor wants to wind up my company?

It is the stuff of business nightmares. Process servers have just served a statutory demand or even worse a winding-up petition on your company. What do you do?

You might be thinking that this could never happen to you or your company. Unfortunately, we are facing a "perfect storm" of supply chain problems, a cost-of-living crisis and high interest rates that will increasingly impact the ability of companies to pay their debts as they fall due. It therefore seems inevitable that we will see an increase in the number of winding-up petitions and the threat of liquidation as a means of seeking to recover those debts.

Why is a winding-up petition so serious?

In short, a winding-up (also known as liquidation) almost always spells the end for a company – the liquidation process has been described as giving the company a proper burial. Once a company is wound up, 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 the 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.

What can I do?

The immediate steps you need to take will depend on what stage matters have reached. There are three main stages:-

1. the threat of a winding-up petition;
2. petition presented but not yet advertised; and
3. petition presented and advertised but no order made.

Threat of a winding-up petition

The threat of a winding-up petition usually follows the service of a statutory demand. The statutory demand is a formal written demand for payment of a debt within 21 days. However, the threat can also be made within a solicitor's 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.

The first step is to ask whether this is a debt of your company, and if it is, whether the debt is disputed. If the debt cannot legitimately be disputed, the company needs to pay the debt, or if that is not immediately possible due to short term cash flow issues, engage with the creditor to see if a time to pay arrangement might be available.

If the debt is disputed, the courts are very clear that the winding-up process is not the place to resolve that dispute. If the debt is disputed on bona fide and substantial grounds, the person making the threat simply doesn't have grounds to present a petition as they cannot, until the dispute is resolved in their favour, say that they are a creditor of the company.

If your position is that the debt is disputed, you must respond immediately setting out the basis on which the debt is disputed and asking for an undertaking that no steps will be taken to present a winding-up petition until the debt has been determined. Not providing an undertaking and going ahead with a winding-up petition in a situation where there is a substantial defence to the debt is an abuse of process and will result in the petition being dismissed with an award of costs in your favour. That is something that you will want to make clear in your correspondence with your opponent.

If the ground on which you are disputing the debt has no rational prospect of success, a court will not be interested and the creditor will be free to proceed with its petition. It is not enough for the company to simply claim that the debt is disputed. It needs to be able to articulate solid grounds on which the debt can be said to be disputed or on which there is a cross-claim. If that is possible, you would normally expect your opponent to provide the requested undertaking.

However, if no undertaking is forthcoming, you need to consider applying to the court for an injunction to restrain presentation of the winding-up petition. The grounds on which the debt is said to be disputed will need to be fully set out in that application. If the court agrees, it will grant an interim injunction preventing a petition being presented in respect of that debt.

Petition presented but not yet advertised

If the petition has already been presented and served on the company, there is a small window in which you can apply for an injunction to restrain advertisement. Once served, the petitioning creditor must give notice of the petition in The Gazette not less than seven business days after service of the petition on the company. The creditor might agree to provide an undertaking not to advertise for a period of time, but if not, your application to the court to restrain advertisement of the petition will need to be made before the expiry of the seven business days.

With the presentation of the petition, you also need to be alive to the implications of section 127 of the Insolvency Act 1986. This provides that where a winding-up order is made, any disposition of the company's property made after the presentation of the petition is void. Therefore, the mere presentation of a petition can seriously disrupt your business. In this scenario, you might want to consider making an application to the court for a validation order that will give both you and the recipient of any payment the comfort that any liquidator who may be appointed in the future will not be able to unwind the payment.

Petition served and advertised

If the petition has been served and advertised, all is not lost in that you can still appear before the court at the hearing to contest the petition on the basis that the debt is disputed. However, you should not underestimate the problems which advertisement of the petition can bring. It is normal for a bank to freeze the company's bank accounts on being notified of the fact that a petition has been presented. Suppliers and customers may also hear about the petition and take steps which adversely impact the company's business. This might include joining the action to add its own debts to those of the petitioning creditor.

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. The decision to apply for an injunction is not one to be taken lightly as it comes with significant cost. However, compared to the potential implications of a winding-up petition being presented or advertised, it is often the only choice available to save the company.

If you have any questions about what to do following the threat of a winding-up petition, please contact Jared Oyston, Andrew Scott or your usual Brodies contact.