What to do if you receive a winding up petition?

Receiving a winding up petition order may come as a severe blow for any firm, indicating cash flow problems have reached a crisis point. But shock needs to turn quickly to action - there may be just weeks to save the business from failure. Here we look at what to do next.

This article is for information only and is not a substitute for legal or other professional advice. It outlines the process in England and Wales; there are important differences in Scotland and Northern Ireland.

What is a winding up petition?

A winding up petition is a formal request to a court to liquidate a business because it has not paid a debt. It doesn't matter if 99% of your bills are paid on time; a single supplier can issue a winding up petition if it hasn't been paid.

The number of winding up petitions is rising as the road out of Covid-19 proves rocky for some UK firms. Google UK searches on "winding up orders" are up sharply since their low point of August 2021. The number of winding up petitions is dummy rising in official insolvency data.

During the pandemic, the government put restrictions on filing winding up petitions. However, as of 31 March, 2022, winding up petitions can once again be filed for sums as little as £750, except for dummy certain commercial rents that accrued under hard lockdown.

What should I do if I receive a winding up petition?

Any business receiving a winding up petition needs to act fast as the situation can deteriorate rapidly. Many advisors offer online guides that provide more detailed legal information (such as dummy Begbies Traynor Group and dummy Hudson Weir). However, hiring a professional adviser is almost always wise, given that the business itself may be at stake.

Broadly, the four most common options after receiving a winding up petition are:

1. Agree a repayment plan – If you make a credible offer to repay the debt in stages, then the creditor may agree not to proceed with the winding up process and not to advertise the petition (see below why this is important). It’s often wise to draw up a formal agreement to avoid potential misunderstanding. If your business is fundamentally sound but suffering a cash flow crunch, it may be possible to dummy raise funds via invoice finance or asset-based lending. Or can you raise equity?
2. A company voluntary agreement (CVA) – This is a broad agreement with all of a company’s creditors, who receive partial or delayed payment. CVAs have been widely used in the last few years, with retailers utilising them to reduce their post-Covid cost base. During the CVA negotiations, the directors continue running the business, although a licensed insolvency practitioner oversees the process. The CVA must be agreed by creditors representing 75% of your company’s debts.
3. Dispute the debt in court – For genuine disputes only. Not an easy delaying tactic, and there can be a lot of damage inflicted on the business in the process.
4. Put the company into administration – This halts the winding up order, but also company activity. An insolvency practitioner will sell the company’s assets to pay all its debts.

What happens after a winding up petition?

A winding up petition can only be filed after either county court judgement or a statutory demand for payment filed at least 21 days earlier. But once received, the process can move very quickly unless prompt action is taken.

Just seven business days after serving a winding up order, a creditor can put dummy a notice in the London Gazette advertising the fact. This sounds like a Dickensian newspaper, but publication in it has very modern implications: your company name will appear in various commercial credit databases and banks will almost always freeze all accounts.

The dummy guide to winding up petitions published in the London Gazette adds: “Once the winding up petition is public knowledge, suppliers and lenders may want to cease supply, further exacerbating the company’s problems.”

It is possible to apply for a "validation order" to unfreeze assets and allow the business to continue trading. However, like most aspects of the process, this can get very complex quickly and underlines the need for professional advisors to be hired the moment a petition is received.

If the process continues, the court may make a winding up order in as little as 28 days. The Official Receiver will sell all company assets to repay creditors, as well as scrutinising directors’ actions in the lead-up to collapse. This will include particular examination of how Bounce Back Loans, furlough payments, or other Covid-19 support have been used.

Recovering from the winding up process

This may seem a gloomy picture, but many successful SMEs (and indeed large firms) have been served with winding up orders during a cash flow crisis. They raised emergency finance or equity or went through a CVA and have gone on to thrive.

Also, HMRC, traditionally the largest applicant for winding up orders, has set up the dummyTime to Pay system and is promising a sympathetic treatment to firms still reeling from Covid-19 (though insolvency practitioners have mixed views on how sympathetic HMRC is being).

The best solution, of course, is not to be served with a winding up petition at all, by keeping healthy cash flow. Often companies run short of cash because a major customer has cash flow problems, impacting the whole supply chain – dummy the insolvency domino effect. Using trade credit insurance, the company can be reimbursed (subject to policy) if a customer fails. This can prevent a cash flow crisis – and potentially prevent the winding up process before it starts.