Cornerstone - Are you winding me up?

12 November 2019

Winding-up petitions are being used increasingly in the construction industry as a means of recovering unpaid debts. It is the ‘nuclear’ recovery option because the consequences for the recipient company can be catastrophic (both for its reputation and financially). So when responding to a winding-up petition, time is very much of the essence.

An unchallenged winding-up petition will result in the recipient company being placed into compulsory liquidation and eventually dissolved. Game over. As such, given the potential consequences, all companies should have a set procedure in place for recognising winding-up petitions and getting them dealt with by an appropriate individual as an absolute priority. In terms of avoiding the possibility of bank accounts being frozen and supply lines being withdrawn, we are talking hours from receipt, not days.

Once a winding-up petition has been served on a company, the petitioning creditor must wait at least seven business days before it can be advertised in the London Gazette. That seven business day period used to provide the recipient company with a window of opportunity to deal with the petition before it could be advertised and inevitably picked up by credit agencies, creditors, and suppliers. However, that is no longer always the case. Now, it is not uncommon for news of a winding-up petition to be picked up by credit agencies (and their subscribers) soon after it has been issued and well before it can be advertised. This can result in other creditors supporting the winding-up petition, which makes the position instantly more complicated to resolve.

With the above in mind, here are some steps you should be taking if your company is served with a winding-up petition:

  1. if the sum claimed in the petition is due, pay it immediately. You will usually be required to pay the petitioning creditor’s costs too. Ensure that as soon as cleared funds are received by the petitioning creditor, the creditor immediately files an application at Court for the withdrawal of the petition
  2. if you cannot afford to pay the sum claimed in the petition immediately, take steps to try and agree a repayment plan with the petitioning creditor. If possible, negotiate the withdrawal of the winding-up petition to prevent other creditors from supporting it. If you are unable to convince the petitioning creditor to withdraw the petition, seek an undertaking from the petitioning creditor not to advertise it provided you comply with the agreed repayment plan. The sooner you can pay the debt, the less likely it is that the petition will get into the public domain
  3. if you genuinely dispute the sum claimed in the winding-up petition, you need to provide the petitioning creditor with details of the dispute as a matter of urgency. At the same time, you must request an undertaking that the petition will not be advertised. Having set out the details of the dispute, you should invite the petitioning creditor to voluntarily withdraw the petition on the basis that the sum claimed is genuinely disputed. If you do not get a satisfactory response, you will need to file an urgent application (before the date the petition can be advertised) for an injunction to restrain the advertisement of the petition. At the same time, you should also seek an order for the dismissal of the petition on the grounds that it has been issued in respect of a genuinely disputed debt (and is therefore an abuse of process). You should seek your costs on the indemnity basis.

Above all, never hide from a winding-up petition and hope that it will go away. It won’t. The sooner you take action, the more likely it is that you will be able to protect your business from serious reputational and financial harm. Similarly, if a winding-up petition is threatened, crossing your fingers that the threat won’t be followed through on is rarely good practice - as soon as insolvency proceedings are mentioned, our experience is that dealing with the issue head on is the sensible, not to mention most cost-efficient, response.

This article is from the autumn 2019 issue of Cornerstone, our newsletter for those working within the construction industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at November 2019.

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