Trading During a Winding-Up Petition: What Company Directors Must Know

Receiving a winding-up petition is one of the most serious legal events a company director can face. Beyond the immediate threat to the company’s existence, the petition triggers a cascade of legal consequences one of the most pressing being the question: can you legally continue to trade while a winding-up petition is pending? The short answer is: yes, but with extreme caution and within tightly defined legal boundaries. This article explains those boundaries clearly, drawing on the relevant statutory framework, case law, and the critical concept of validation orders.

If your company has been served with a winding-up petition whether by HMRC, a trade creditor, or another party you should seek specialist legal advice immediately. At Winding Up Petition Solicitors, our City of London solicitors and barristers have advised on hundreds of cases and can help you navigate this period with precision and confidence.

What Happens to a Company’s Assets When a Winding-Up Petition Is Presented?

The moment a winding-up petition is presented at court (not merely served), section 127 of the Insolvency Act 1986 becomes relevant. This provision states that, in a compulsory winding up, any disposition of a company’s property made after the commencement of the winding up is void unless the court orders otherwise.

Critically, the ‘commencement of winding up’ for a compulsory liquidation is deemed to occur at the time the petition is presented to the court not when the winding-up order is ultimately made. This creates a significant and often misunderstood legal trap: dispositions of company property made during the period between petition presentation and any eventual winding-up order may be retrospectively voided.

This means that if the company continues trading paying suppliers, receiving customer payments into its bank account, selling assets those transactions may be unwound after a winding-up order is made, potentially exposing directors to serious personal liability and claims by a liquidator.

What Counts as a ‘Disposition’ Under Section 127?

The courts have interpreted ‘disposition’ broadly. In Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, the Court of Appeal held that ordinary payments into and out of a company’s bank account during the relevant period could constitute dispositions of the company’s property. Buckley LJ confirmed that where a bank account is in credit, payments out reduce the company’s property; where in overdraft, payments in reduce the liability both may be caught by section 127.

Similarly, in Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch 555, the Court of Appeal confirmed that banks which continue to process transactions through a company account after petition presentation can face liability unless protected by a validation order or the court’s discretion.

Can You Continue Trading? The Role of Validation Orders

Yes, but the mechanism for doing so lawfully is a validation order. A validation order is a court order made under section 127 of the Insolvency Act 1986 that retrospectively or prospectively validates specific dispositions of company property, rendering them effective and beyond challenge by a future liquidator.

Without a validation order, every payment made by or to the company during the petition period is at risk of being void. This has serious implications not only for the company but for third parties who transact with it in good faith they may find that payments received must be repaid to the liquidator.

Our validation order specialists can advise on whether an order is appropriate for your circumstances and act swiftly to obtain one from the court.

When Will a Court Grant a Validation Order?

The court has a broad discretion but will not grant a validation order as a matter of course. The leading guidance comes from Re Tain Construction Ltd [2003] 2 BCLC 374, where the court set out that validation is most likely where the transaction is in the ordinary course of business and is likely to benefit unsecured creditors as a whole not merely the party seeking the order.

Typically, validation orders are granted where:

• The company is solvent and the petition debt is genuinely disputed.
• The transaction is necessary to preserve the value of the company’s assets or goodwill.
• Creditors generally will benefit from the disposition rather than being prejudiced by it.
• The company can demonstrate that continuing to trade is in the interests of all stakeholders.
• Receipts into the bank account are consistent with normal business operations.

Directors’ Personal Liability When Trading During a Petition

Even where trading is technically lawful, directors must exercise careful judgment about their conduct during the petition period. Continued trading while knowingly insolvent or trading in a manner that worsens the position of creditors may give rise to claims of wrongful trading under section 214 of the Insolvency Act 1986.

Wrongful trading arises where a director knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation and failed to take every step to minimise potential loss to creditors. This is an objective test it does not require dishonesty.

Directors who continue to trade recklessly during a winding-up petition period, without seeking legal advice or a validation order, may face personal contribution orders if the company subsequently enters insolvent liquidation. Our specialist team at LEXLAW can help directors understand the scope of their duties and protect their personal position throughout this difficult process.

Fraudulent Trading

In the most serious cases, where a director carries on trading with intent to defraud creditors section 213 of the Insolvency Act 1986 provides for claims of fraudulent trading. Unlike wrongful trading, this requires actual dishonest intent, but the consequences are more severe and can include criminal prosecution. Directors should be under no illusion: continuing to accept customer deposits, issue invoices, or make payments during a petition period without legal authority can, in extreme circumstances, be treated as fraud.

The Impact on the Company’s Bank Account

One practical consequence of the section 127 regime is the effect on banking relationships. Once a bank becomes aware of a winding-up petition typically through advertisement in the London Gazette it is likely to freeze the company’s bank account to protect itself from liability for processing void transactions.

Advertisement of the petition usually occurs seven business days after presentation, making the window between presentation and advertisement a critical period in which to act. If a bank freezes the account, the company may be unable to pay wages, suppliers, or other operational costs, which can trigger the very insolvency the directors were seeking to avoid.

A validation order obtained before or shortly after advertisement can unfreeze banking operations and permit the company to continue on a lawful basis. For further detail on this process and the full petition timeline, see our step-by-step guide for directors.

Opposing the Petition: The Preferable Route

While validation orders are essential tools for protecting ongoing transactions, the most effective long-term strategy where grounds exist is to oppose the winding-up petition itself. If the petition debt is genuinely disputed on substantial grounds, the company can apply to have the petition dismissed or stayed pending resolution of the underlying dispute.

In Tallington Lakes Ltd v Ancasta International Boat Sales Ltd [2012] EWCA Civ 1712, the Court of Appeal emphasised that where there is a genuine and substantial dispute as to the debt, the court will ordinarily dismiss or adjourn the petition rather than allow it to proceed to a winding-up order. The petition process is not intended as a debt collection mechanism where the debt itself is contested.

Whether opposing the petition, applying for an adjournment, or seeking injunctive relief to restrain advertisement, our team can advise you at every stage. Visit our opposing a winding-up petition page to understand your full range of options.

HMRC Winding-Up Petitions: Additional Considerations

A significant proportion of winding-up petitions in England and Wales are issued by HMRC for unpaid corporation tax, VAT, PAYE, or National Insurance contributions. HMRC has broad powers and is an experienced and aggressive petitioner. However, even HMRC petitions can be challenged, adjourned, or resolved through a Time to Pay arrangement.

If the company has been the subject of an HMRC enquiry giving rise to a disputed tax assessment, the disputed element should not form the basis of a winding-up petition at all. Our colleagues at Tax Disputes solicitors can assist where underlying tax liability is itself in question.

Directors should also be aware that if the company has received professional advice from accountants, tax advisers, or solicitors that has worsened the company’s position, separate claims for professional negligence may be available which can materially affect the company’s net liability position.

Practical Steps Directors Should Take Immediately

If your company has been served with a winding-up petition, act immediately:

• Do not ignore the petition. Inaction is the most dangerous course available to you.
• Seek specialist legal advice within 24-48 hours of receipt the window to act is narrow.
• Do not make any payments from the company’s bank account without legal advice on section 127 exposure.
• Do not accept any receipts into the company account without understanding the validation position.
• Contact your bank proactively to explain the situation and explore whether a validation order can prevent a freeze.
• Assess the underlying debt: is it genuinely owed, disputed, or subject to a cross-claim?

Consider a Time to Pay agreement if the debt is owed to HMRC and legitimate grounds exist for structured repayment

How LEXLAW Can Help?

At LEXLAW we understand the urgency and complexity that follows the presentation of a winding-up petition. Our specialist insolvency team has extensive experience in advising directors on validation orders, resisting petitions, negotiating with creditors (including HMRC), and protecting both the company and personal positions of its directors. We act swiftly and strategically, ensuring that every available legal avenue is explored whether that involves securing immediate court relief, preserving business continuity, or challenging the petition at its core. If you are facing a winding-up petition, early, decisive legal intervention can make the difference between recovery and closure