Case Study: Abusive Winding Up Petition successfully dismissed

Our firm was instructed by a UK Company on an urgent basis on a Saturday afternoon. The consequences of a winding up petition for a company and its ability to trade can be damaging therefore it is important to act quickly and for a company facing a winding up petition to seek legal advice as soon as possible.

By Monday morning our specialist insolvency team had reviewed a lot of the relevant documents received from the Company and were in a position to advise the Company on the misconceived petition that had been issued by an investor, which was based on a disputed debt which was not yet due to him.

Genuinely and Substantially Disputed Debt

The Company provided us with detailed instructions and documents concerning a dispute around the debt which was sought pursuant to a loan agreement between the parties. It became clear that the Petitioner had issued this misconceived litigation in order to seek a financial advantage for himself by seeking to recover a debt which he knew to be disputed and which was not yet owed to him.

Generally, the Court will not allow a winding up petition to be presented where there are real and substantive grounds for disputing the debt. There must be sufficient evidence to persuade the Court that there is a genuine dispute as to the company’s liability to pay the debt.

Injunction to Restrain Advertisement and Seek Dismissal of Petition

Once a petition has been received, the company can apply to the High Court for an injunction preventing the presentation and/or restraining the advertisement of a winding up petition under rule 7.24 of the Insolvency Rules 2016.  

Within two working days of our instruction, we prepared and issued an application on behalf of the Company to restrain advertisement and seek dismissal of the winding up petition on the grounds that:

  1. the debt was not yet due because under the contract between the parties, the Petitioner could not recover the sums under the contract until the stipulated date and it had completed the performance of its obligations; and
  2. the Company had a substantial dispute raised on bona fide grounds in respect of the amount claimed under the petition.

This case demonstrates that if there are substantive grounds for disputing the debt, the petition is likely to be dismissed. However, sufficient evidence must be submitted in order to persuade the Court that there are genuine grounds for disputing the debt.

Solvency of the Company

The reasons why a person might seek to have a company wound up are broad ranging. The most common reason is that the company has become unable to pay debts owing to its creditors (section 122(1)(f), Insolvency Act 1986 Act).

Following receipt of our application to restrain advertisement and seek dismissal of the petition which clearly set out the Company’s dispute surrounding the debt claimed under the petition, the Petitioner sought to amend the petition arguing that the Company was insolvent.

Section 123 of the Insolvency Act 1986 states:

(1) A company is deemed unable to pay its debts—

(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or

(b) if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or

(c) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or

(d) if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or

(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.

(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

In order to defend a winding up petition presented on the basis that the Company is insolvent, it is helpful to obtain management accounts and profit forecasts for the Company in order to satisfy the Court of the Company’s solvency and successful ongoing trading. It is important to note that a petition will be determined at the Judge’s discretion, therefore valid evidence to support the Company’s position is helpful.

Successful dismissal of Petition

We had warned the Petitioner and his legal team of the Company’s position in relation to the malicious petition and dispute concerning the debt both at the outset and throughout the proceedings but to no avail and the Petitioner seemed determined to litigate to the ‘doorsteps of the Court’, when he finally gave up his meritless claim, less than one working day before the remote hearing which had been listed to take place, amidst the current COVID-19 situation.

As a result of our successful dismissal of the petition, the Petitioner is faced with not only his own legal costs but as the losing party in this litigation, he is also required to pay towards the Company’s legal costs and the court fees on the indemnity basis (a punitive basis) as a result of his unreasonable conduct. We obtained an interim order for the Petitioner to make an interim payment towards the Company’s legal costs pending detailed assessment.

Following the Company’s successful dismissal of the abusive Petition, the Company can now continue trading as normal.

Successful Winding-up Petition Legal Advice

We recommend that you let experts handle your matter. Here’s why:

  • Reduce failure risk from attempting to manage and understand rules and laws yourself
  • Expert assistance and advice which can obtain a much better result
  • Dedicated specialists which results in a faster solution to your problem

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