Winding-Up Petitions can be a very effective method when pursuing companies for an outstanding debt. Generally a last resort, they are a drastic strategy for recovering money. Faced with being wound up, even the most unresponsive companies can react promptly. If a debt is due, the simplest response is for a company to pay. Often though, companies on the receiving end of a Winding-Up Petition will resort disputing the debt that forms the basis of the petition.
The Winding-Up Petition
The right for a creditor to present a Winding-Up Petition is set out in section 124 of the Insolvency Act 1986. The grounds usually cited for the petition are that the company cannot pay its debts. To ensure it has the necessary standing, a creditor must be able to prove that it is owed a debt of at least £750 by the company which has not been paid. Creditors issuing a Winding-Up Petition must be sure of their claim because, if wrongly issued, hefty cost orders and injunctions may follow.
The primary defence raised by companies on receipt of a Winding-Up Petition is to claim that the debt is not in fact owed because it is disputed. This usually entails a direct dispute over the existence of the debt itself or, in some cases, a company will dispute the debt on the basis of set-off or cross-claim that is equal to or exceeds the debt pursued.
If the debt is disputed in good faith and on 'substantial grounds' the court will consider whether or not the defence has a real prospect of success. If it decides that there is a real prospect of success then the petition will normally be struck out.
Preventing a Creditor from Relying upon a Winding-Up Petition
There are a number of underlying reasons that the courts will prevent a creditor from relying upon a Winding-Up Petition if a debt is disputed:
- The petitioner lacks the standing to make the petition;
- The company was justified in not paying the petitioner;
- The court's jurisdiction to hear winding-up petitions should not be used for deciding factual disputes, which are more properly determined in a full trial; or
- Irreparable damage may be done to a company that would discharge a liability if it could clearly be shown to exist.
Nonetheless, the courts always retain discretion to strike out a petition even in cases where it can be proved that the company is insolvent.
If your company has received a Winding-Up Petition or is considering issuing one, Rollingsons has lawyers experienced in advising on business law matters. For more information please contact James Crighton (JCrighton@rollingsons.co.uk) via e-mail or by phone on 0207 611 4848.