The distinction is important:

• A winding up petition is the creditor’s application to the court.
• A winding-up order is the court’s decision to place the company into compulsory liquidation.

Directors usually remain in control while the petition is awaiting a hearing, unless a provisional liquidator is appointed or the court makes another order.

However, transactions involving company money or assets after presentation of the petition may be challenged if the company is subsequently wound up. Directors should therefore take advice before making unusual payments, transferring assets or disposing of company property.

Read our separate guide to the difference between a statutory demand and a winding up petition.

Although the precise procedure can vary, the normal stages are:

1. The creditor files the petition: The court lists a hearing and the creditor pays the applicable court fee and petition deposit.
2. The company is served: The petition should provide details of the creditor’s claim and the court hearing.
3. Notice may be advertised: Subject to the applicable rules and any court directions, notice of the petition is normally advertised in The Gazette.
4. The court considers the petition: The court may make a winding-up order, dismiss the petition, adjourn the hearing, allow the petition to be withdrawn or make another appropriate order.

Once the petition is advertised, banks, suppliers and other creditors may become aware of the proceedings. Other creditors may also support or oppose the petition.

Directors should not assume that paying the original petitioner will automatically end the case, particularly if another creditor has become involved.

Do not wait for the hearing before responding.

Check the petition carefully

Confirm:

• who has presented it;
• how much is being claimed;
• whether the amount is correct;
• whether payments or credits are missing;
• whether the debt is genuinely disputed; and
• the date, time and location of the hearing.

Keep copies of the petition, creditor correspondence, contracts, invoices and evidence of payments.

Establish the company’s wider position

The petition may relate to one creditor, but the correct response depends on the company’s overall finances.

Directors should establish:

• what the company owes;
• which liabilities are overdue;
• what cash and assets are available;
• whether current wages and taxes can be paid;
• whether the underlying business remains viable; and
• whether further losses are likely.

Avoid repaying directors, connected parties or selected creditors without advice. Payments and transfers can be examined if the company later enters liquidation.

The available options depend on whether the debt is valid, whether the company can pay and whether the business remains viable.

Pay or settle the debt

If the company can pay, the creditor may agree to withdraw the petition. Any settlement should deal with the debt, interest and recoverable costs and should be properly documented.

Payment may not end the proceedings if another creditor has supported the petition or is allowed to take it over.

Read more about whether a winding up petition can be withdrawn.

Dispute the petition

A petition should not be used simply to pressure a company into paying a debt that is genuinely disputed on substantial grounds.

Potential grounds for opposing a petition may include:

• the debt has been paid;
• the amount is not owed;
• there is a genuine and substantial dispute;
• the company has a valid cross-claim;
• the petition was not properly served; or
• the proceedings are an abuse of process.

Disputing a petition is a legal matter. Directors should obtain appropriate legal advice rather than relying solely on informal negotiations with the creditor.

Consider rescue or insolvency options

Where the underlying business is viable, options may include a Company Voluntary Arrangement or company administration.

If the company cannot realistically recover, a Creditors’ Voluntary Liquidation may sometimes provide an alternative to compulsory liquidation.

None of these processes automatically stops an existing petition. Their suitability and effect will depend on timing, the company’s circumstances, creditor support and any relevant court decisions.

If the court makes a winding-up order, the company enters compulsory liquidation and control passes away from its directors.

The Official Receiver is normally appointed initially. Their responsibilities can include:

• taking control of company assets;
• establishing what the company owns and owes;
• reviewing transactions before liquidation;
• examining the conduct of the directors; and
• realising assets for creditors.

The company will normally stop trading unless continued trading is considered necessary for the liquidation. Employees are commonly made redundant, and the company will eventually be removed from the Companies House register.

A petition does not automatically make a director personally liable for the company’s debts. A limited company is a separate legal entity.

Personal exposure can arise in particular circumstances, including:

• an enforceable personal guarantee;
• an overdrawn director’s loan account;
• misapplication of company money or assets;
• certain preferences or transactions at an undervalue;
• fraudulent trading;
• wrongful trading where the legal conditions are met; or
• other misconduct or breaches of duty.

Continuing to trade while insolvent does not automatically establish wrongful trading. The company’s prospects, what the directors knew and the steps taken to minimise potential creditor losses will all be relevant.