Who can petition to wind a company up and when?

by | Aug 26, 2019 | Advice to Directors, CVLs, Ethics & Regulation | 0 comments

A compulsory liquidation is started off by the presentation of a petition in court to wind up the company.

What grounds does the petitioner have to show?

There are several a petitioner has to show, all set out in section 122 of the Insolvency Act 1986:

  1. The company resolves by special resolution to wind up compulsorily;
  2. A public listed company has not been issued with a trading certificate and 12 months have passed since incorporation
  3. A public listed company has not commenced business within a year from incorporation or, suspends its business for a whole year
  4. The company is unable to pay its debts
  5. The court decides that it is just and equitable that the company should be wound up.  This could be where the main purposes of the company has failed; where there is deadlock in management; where a person has been excluded from management; where the company was formed to carry out a fraud or to carry on an illegal business.

Of the above, 1-3 are very rare, 5 rare and 4 by far the most common.

Let’s investigate 4 in more detail…

Inability to pay debts

An inability to pay debts can be shown in any one of 4 ways:

  • There is an unsatisfied ‘statutory demand’
    1. The debt must:
      1. Exceed £750 and must be due to a single creditor
      2. Be for a liquidated sum which is due and payable now
  • Not be disputed on ‘substantial grounds’
  1. Not be cancelled out entirely or reduced to below the sum of £750 by a genuine counterclaim or set-off.
  1. The statutory demand must have been properly served at the registered office of the company, with there being satisfactory evidence of such service.
  2. To satisfy a statutory demand, payment must have been made or secured to the reasonable satisfaction of the creditor within the 21 days of service.
  3. Unlike the situation in personal insolvency, a statutory demand served on a company cannot be ‘set aside’. If the debt is disputed and the creditor cannot be persuaded to withdraw it voluntarily, the debtor company must apply to the court to either halt the presentation of a winding up petition, or, if it has already been presented and issued, stop its advertisement. The court will then grant an order if it is satisfied that there are good grounds for believing that the debt is disputed on proper grounds.
  • There is a an unsatisfied execution

    After the court has found a company liable to pay a debt, if the judgment creditor is unsuccessful in enforcing judgment, he can then issue a winding up petition.

  • Where the court is satisfied that the company is unable to pay its debts as they fall

    This is a commercial insolvency test, typically based on evidence of an unpaid, undisputed invoice.

    Unlike personal insolvency, in corporate insolvency there is no legal requirement to serve a statutory demand before issuing a winding up petition. However it is sensible to do so in case the existence or size of the debt is disputed (see 1).

  • Where the court is satisfied that the value of the company’s assets is less than the value of its liabilities

This is the so called ‘balance sheet test’.  Assets are to be included at ‘estimated to realise figures’, contingent and prospective liabilities have to be brought into the calculation.

PB comment: Lots of UK companies would be insolvent on such a basis… the balance sheet test is the subject of many legal cases/challenges.

Who can present a winding up petition?

The following can present a winding up petition:

  • The company itself
  • The directors of the company

    In this case the petition is in the directors’ own names

  • A creditor or group of creditors
  • The members of the company

    In this case the members need to be able to demonstrate an interest in the winding up

  • The Secretary of State

    Rarely, normally in cases of fraud or other wrongdoing in the company.

  • The Official Receiver where the company is already being wound up voluntarily
  • The Attorney General under s30 of the Charities Act against a charitable company
  • A Clerk of the Magistrates Court where there are unpaid fines on the company
  • The Supervisor of a failing CVA
  • The Administrator of the company for example as an exit mechanism from the administration
  • The Administrative Receiver of the company in a similar way to that of Administrators.

By far and away the most common petitioners are creditors, and in particular HMRC.