Can a Creditor Wind Up Your Company Over a Disputed Invoice?

Yes, a creditor can threaten to wind up your company over an invoice you dispute, but the Companies Court will ordinarily refuse to wind the company up if the debt is genuinely disputed on substantial grounds. A winding-up petition is a remedy for a company that cannot pay its debts. It is not a forum for deciding whether a contested invoice is owed. That protection is not automatic, however. It depends on the dispute being raised early, in writing and with evidence, and a company that ignores a demand, or answers it with a bare denial, can still face an advertised petition and a frozen bank account.

Directors usually ask this question when a statutory demand arrives for an invoice they believe is wrong, whether because the work was defective, the price was never agreed or the goods were never delivered. Creditors ask it from the other side, wondering whether a petition is a quick way to recover an unpaid invoice. We explain below how the court approaches a disputed debt, which cases govern the point, and what each side should do

When can a creditor petition to wind up a company?

A creditor’s petition rests on section 122(1)(f) of the Insolvency Act 1986, which allows the court to wind up a company that is unable to pay its debts. Section 123 explains when that is established. The most common route is section 123(1)(a): the creditor serves a statutory demand for a sum exceeding £750 at the company’s registered office, and the company neglects to pay, secure or compound for the sum within three weeks. A company is also treated as unable to pay its debts if it cannot pay them as they fall due (section 123(1)(e)) or if its liabilities exceed its assets (section 123(2)). Our guide to making and serving a statutory demand explains how creditors use this step.

No judge reviews the demand when it is served, so the creditor does not have to prove the debt at that stage. That is why a disputed invoice can still produce a demand, and why the company must raise the dispute itself rather than assume the court will spot it.

The disputed debt rule: the case law

The courts have long held that a winding-up petition should not be used to enforce a debt that is genuinely disputed. In Mann v Goldstein [1968] 1 WLR 1091, Ungoed-Thomas J held that the court will restrain a petition where the debt is bona fide disputed on substantial grounds, because the winding-up jurisdiction is being misused. The Court of Appeal approved that reasoning in Stonegate Securities Ltd v Gregory [1980] Ch 576, and Harman J applied the same principle in Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114. The normal practice is to dismiss the petition and leave the creditor to establish the debt in ordinary proceedings. Our guide to opposing a winding-up petition on a disputed debt covers the procedure.

The test favours the company at the threshold. In Tallington Lakes Ltd v Ancasta International Boat Sales Ltd [2012] EWCA Civ 1712, the Court of Appeal confirmed that the court is normally concerned only with whether a dispute on substantial grounds exists, not with deciding it. The court retains a discretion under section 125(1) of the Insolvency Act 1986, but a company that raises a real dispute can usually expect dismissal.

What counts as a genuine dispute over an invoice?

Disputes that succeed are specific, evidenced and raised before the petition is presented. Typical grounds include:

• goods or services not supplied, or materially defective;
• a price or rate that was never agreed, or a contract variation;
• payment conditions (such as a milestone or certificate) that have not been met;
• an invoice already paid or credited; and
• a genuine set-off or counterclaim.

Disputes that fail are those first raised at the hearing, general complaints with no documents behind them, and excuses that are really an inability to pay. A dispute about only part of an invoice may leave the balance, if it exceeds £750, as an undisputed debt that can support a petition. The court compares what the company said before the petition with the evidence it files afterwards, so consistency matters.

What to do if a statutory demand arrives for a disputed invoice

Unlike an individual, who can apply to set a demand aside within 18 days under rule 10.4(2) of the Insolvency (England and Wales) Rules 2016, a company has no set-aside procedure, so its response has to come from the company. Our pages on setting aside a statutory demand and statutory demand challenges explain the difference. For a company, we would take these steps:

1. Diarise the three-week period, which runs from service at the registered office.
2. Reply in writing before it ends, rejecting the invoice with specific reasons and enclosing the key documents.
3. Pay any genuinely undisputed element, expressly reserving your position on the rest.
4. Warn the creditor that a petition would be an abuse of process and that you will seek costs and, if necessary, an injunction to restrain presentation.
5. If a petition is advertised or presented, act at once: restrain the advertisement, serve evidence in opposition and follow our step-by-step defence guide.

Why acting early matters

Once a petition is presented, section 127 of the Insolvency Act 1986 makes any disposition of the company’s property void unless the court orders otherwise, which is why banks often freeze accounts. Our guide to a bank account frozen after a winding-up petition explains the options, and a validation order may allow the company to keep trading. Advertisement in The Gazette alerts suppliers and customers and can damage the business even if the petition is later dismissed. A winding-up order, by contrast, ends the directors’ control and puts their conduct under scrutiny: see the consequences of winding up and the risks for directors. Our overview of how to challenge a winding-up petition shows what the court expects to see.

Risks for a creditor who petitions on a disputed invoice

A creditor who presses on regardless risks dismissal of the petition, adverse costs and, in extreme cases, a claim that the petition was presented maliciously. The better course, where the invoice is disputed, is a court claim, followed by summary judgment under CPR Part 24 if there is no real prospect of defending it, and then a petition on any unpaid judgment debt. Our pages on debt recovery, pre-action steps and late payment compensation set out those options. Where an invoice is not genuinely disputed, a letter before winding-up action remains a powerful tool.

HMRC debts, limitation and adviser negligence

Where HMRC is the creditor, disputed tax follows its own appeal routes: see our page on HMRC statutory demands at TaxDisputes.co.uk. If the real defence is delay, read our guides to limitation periods and time-barred debts. And if a company was wound up after poor advice on a demand, you may have a claim: see professional negligence claim solicitors.

How LEXLAW can help

We act for companies and directors facing demands and petitions over disputed invoices, and for creditors deciding whether a petition is the right tool. We are qualified solicitors and barristers, with chambers in Middle Temple next to the Royal Courts of Justice, and we offer a fixed fee advice conference with both. Our work on winding-up petition hearings has been featured in the UK media, and you can read about our costs before you instruct us. Start with our case assessment form, or visit LEXLAW Solicitors & Barristers and Winding Up Petition Solicitors for more. We do not take low value cases or give free 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.