Bridging Loan Default and Winding-Up Petitions

Your company borrowed on a bridging loan, the term has ended and the loan has not been repaid. You may be expecting the lender to take the property. Many directors do not realise that the lender can also go after the company itself, and in some cases ask the court to wind it up.

Bridging loans are short-term, secured on property and expensive. Our bridging loan guide notes that they typically last less than 18 months. This guide explains, in plain English for England and Wales, what a lender can do after default, how a winding-up petition starts, and what you can do while there is still time.

Already received a demand or petition? Start a case assessment or contact our winding-up team straight away. Time limits are short.

ALWAYS OBTAIN SPECIFIC GUIDANCE & ADVICE

The information on this website is not legal advice; you should always obtain specific advice on the circumstances of your case. Our Winding-up Petition Solicitors & Barristers provide specialist legal advice based on decades of expertise. Request a legal assessment or call +442071830529 to get in touch. For regulatory reasons we do not take on low value cases nor provide free legal advice, information or guidance and our team cannot answer questions from non-clients.

Is This Guide for You?

It is for you if you are a director of a limited company that has defaulted on a bridging loan, or you have received a default notice, a letter before action, a statutory demand, a winding-up petition or notice that a receiver has been appointed.

It is probably not for you if you borrowed personally against your own home. Different rules apply to possession claims, see our guide to delaying mortgage repossession under section 36.

Bridging Loan Default: What Can the Lender Do?

When the loan term ends unpaid, the loan is usually due in full, so the lender does not have to wait for another missed instalment. Depending on the loan and the security, the lender can often do several of the following at the same time:

• Add default interest and fees. What it can charge depends on the loan agreement, and some default charges can be challenged. See our case studies on a bridging lender’s default interest claim of around £160,000 and a challenge to a default fee of over £150,000.
• Appoint a receiver and sell the property. Where the mortgage is made by deed, the power to sell or to appoint a receiver arises once the mortgage money has become due (section 101, Law of Property Act 1925).
• Appoint an administrator. If the lender also holds a qualifying floating charge, for example under a debenture, it may be able to appoint an administrator itself (paragraph 14, Schedule B1, Insolvency Act 1986).
• Sue for the debt. The lender can issue a court claim and, if it wins, enforce the judgment.
• Serve a statutory demand and present a winding-up petition. The rest of this guide covers these.

Why Would a Secured Lender Petition?

If the lender has security over a property, selling it is often the quicker route. A petition may still be used for these reasons:

• A shortfall. If the sale does not cover the loan plus default interest, fees and costs, the balance is a debt the company still owes.
• Pressure. In practice, banks commonly freeze or restrict company accounts once a petition is advertised, and lenders can use that as leverage. The court, however, is wary of petitions used to force payment of a debt that is genuinely disputed (see below).
• Other assets. A petition puts the whole company at risk, not just the property that secures the loan.

Statutory Demand After Bridging Loan Default

A petition can be presented on several grounds (section 123). The ones most relevant here are:

• An unpaid statutory demand. The lender is owed more than £750 that is due, serves a written demand in the prescribed form at your registered office, and the company neglects for three weeks to pay, secure or compound for the sum to the lender’s reasonable satisfaction (section 123(1)(a)).
• An unpaid judgment. Enforcement of a court judgment against the company has been returned unsatisfied, in whole or in part (section 123(1)(b)).
• Proof that the company cannot pay its debts. The court is satisfied that it cannot pay its debts as they fall due, or that its assets are worth less than its liabilities, counting contingent and prospective liabilities (section 123(1)(e) and (2)).

A statutory demand is therefore common, but it is not compulsory. Do not assume you are safe because you have not received one. If three weeks pass with no payment and no genuine dispute, the company is treated as unable to pay its debts, which is a ground for a winding-up order. Our guides explain understanding and responding to statutory demands and what to do if you respond late.

An individual can apply to set aside a statutory demand within 18 days of service (rule 10.4). For a company the practical route is to dispute the debt in writing at once and, if the lender will not back down, to ask the court to restrain the petition or to oppose it at the hearing.

Disputed Debt and Winding-Up Petitions

A winding-up petition is not meant to be used to force payment of a debt that is genuinely disputed on substantial grounds. The court can restrain advertisement or dismiss the petition where, for example, the company has a genuine dispute or cross-claim. You need real evidence, not just an honest belief that you do not owe the money.

On a bridging loan, disputes often concern:

• default interest or fees that you say the loan agreement does not allow, or that are an unenforceable penalty;
• a lender that refused or obstructed redemption when you were ready to repay; or
• how the loan was sold to you, including broker or lender conduct (see our page on mis-sold bridging loans).

Read our guides to opposing a winding-up petition, restraining advertisement of a petition and restraining presentation of a petition. A dispute that is only a delaying tactic is unlikely to succeed.

Personal Guarantee Risks for Directors

Bridging loans to companies are often backed by a personal guarantee from the director. If you gave one, the lender can pursue you personally for the same debt, whatever happens to the company.

A creditor’s bankruptcy petition generally needs an unsecured debt of at least £5,000 (section 267) and, in most cases, a statutory demand to you personally that has gone unmet for three weeks (section 268). Remember the 18-day window to apply to set a personal demand aside. Defending the company and your personal position usually needs to happen together. See our guide to personal guarantee enforceability (Funding Circle example).

Winding-Up Petition Timeline

1. Petition presented. The court issues the petition and it is served on the company at its registered office. If a winding-up order is later made, the winding up is treated as starting when the petition was presented (section 129(2)).
2. Advertised in the Gazette. The notice must be gazetted not less than seven business days after service and not less than seven business days before the hearing (rule 7.10). Notices appear in The Gazette.
3. Bank accounts often frozen. There is no automatic legal freeze, but in practice banks commonly restrict accounts once they learn of an advertised petition.
4. Hearing. The court can dismiss the petition, adjourn it or make a winding-up order. An adjournment can give time to pay, refinance, dispute the debt or enter a rescue process (see obtaining an adjournment).
5. If an order is made. The company goes into compulsory liquidation and the Official Receiver takes charge. Directors must co-operate, and the Official Receiver can look at directors’ conduct (GOV.UK guide to liquidation; Companies House overview).

Under section 127, if a winding-up order is made, dispositions of the company’s property after the petition was presented, including payments from a frozen account, are void unless the court orders otherwise. A validation order can protect payments the business needs to keep trading.

Your Next Steps

1. Write down the dates. Note when the loan expired, when any demand was served and the date three weeks later. If a petition is served, note the earliest advertisement date.
2. Do not ignore any letter or court document. Make sure whoever opens post at the registered office passes it to you the same day.
3. Check the figures. Compare the lender’s demand, including default interest and fees, against the loan agreement and ask for a redemption statement.
4. Check your guarantee position. Find out whether you or another director signed a personal guarantee and whether it is secured on your own property.
5. Get advice before the petition is advertised. Options can include paying or refinancing, negotiating, disputing the debt, asking for an adjournment, a company voluntary arrangement or administration.

How LexLaw Can Help

LexLaw’s teams deal with bridging loan disputes and winding-up petitions together, which matters because the two issues usually overlap. We can:

• Review your loan, security, default charges and redemption terms, and challenge charges that may be unenforceable (bridging loan advice);
• Advise on your options if you face a statutory demand or petition, including disputing the debt, applying to restrain advertisement or presentation, seeking an adjournment or a validation order (winding-up petition advice);
• Represent the company at the Companies Court.

This article is general information for England and Wales and is not legal advice.

ALWAYS OBTAIN SPECIFIC GUIDANCE & ADVICE

The information on this website is not legal advice; you should always obtain specific advice on the circumstances of your case. Our Winding-up Petition Solicitors & Barristers provide specialist legal advice based on decades of expertise. Request a legal assessment or call +442071830529 to get in touch. For regulatory reasons we do not take on low value cases nor provide free legal advice, information or guidance and our team cannot answer questions from non-clients.