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  What is a Winding Up Petition?  

What is a Winding Up Petition?

A winding up petition is the precursor to what is a more familiar term to the laymen, compulsory liquidation. To express it simply, it is the initial process in the closing of a limited company that cannot or refuses to pay its debts.  It is generally instigated by a creditor that is owed at least £750 by the company. There are certain procedures that must be followed to force the closure, but if successful then there are a number of serious consequences.

The first step in a compulsory liquidation is for the creditor to present a petition to court for the action to proceed (the 'winding up petition'), so strictly a winding up petition could be defined as the initial petition presented to the Court in order that the company can be compulsorily liquidated.

The petition will be presented to the High Court, or alternatively to the District Registry of the High Court serving the area of the company's trading or registered address.  If the paid up or credited share capital is below £120,000, the winding up petition can be presented in a relevant County Court that deals in such matters covering the same area.

The Court will then establish that the creditor has taken reasonable steps to collect any sum due, and may also check that a previous Count Court judgment has been made in the creditor's favour and that the debt is still unpaid. Prior to presenting the petition to court, the creditor should also have served a Statutory Demand with proof of service, with the debt still unpaid 21 days after that.

What happens next?
If the Court decides that the debt is still unpaid in spite of the creditors having done all they can under the law, then it may accept the petition which is then issued to the company in question. The company, or debtor, will then have seven days in which to settle the debt or resolve the situation in a manner acceptable to creditors.

Apart from settling the amount owed in full, a payment arrangement could be agreed between the company and the creditor, or the company could claim a business dispute and request that the court do not order the proceedings of the case to be published in the London Gazette. A failure on the company's part to take any of these three possible actions will result in the winding up petition being advertized in the London Gazette.

What happens if the company does not pay the debt?
If the company still does not pay the debt or claim that the petition is unreasonable, the Court will then issue a Winding up Order which begins the liquidation process. All employees are immediately made redundant with the status of 'preferential creditors' and will be paid a maximum of £800 if that much is available after deduction of the liquidator's fees.  They then join the queue of unsecured creditors.

The liquidator will then put all of the assets of the company up for sale, and the proceedings will be used to pay the creditors according to a hierarchy beginning with the liquidator's fees, then secured creditors and so on until the unsecured credits come last along with shareholders owed money. The directors will also be investigated, and if any illegal actions have been taken by them, then they may be struck of off and barred from holding any director's posts, including current ones, for a specified period of time.

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Are the Directors Liable?
Directors may be held personally liable for the company debt if they continue trading the company once the winding up procedure has commenced. No sale of company property or share transfers can be made, and the status of shareholders cannot be altered once the process has started; any such activity will be declared null and voice.  Individual directors may be held personally responsible for any financial loss that results from a breach of this order.   

Ultimately the company will cease to exist and all assets distributed amongst creditors.  The shares are suspended from trading and the company is valued at the current share price. However, shareholders take their place alongside unsecured creditors in the payout priority list and can frequently write their shares off as a capital loss.

The directors and shareholders can purchase the company after liquidation, providing more money for creditors, and become what is known as a 'Phoenix'. This is not illegal as long as all parties involved have acted with propriety and within the law. The creation of a Phoenix is fairly common in cases of liquidation.

However, the answer to the question 'What is a winding up petition?" is that it is the initial petition made to the High or County Court for the 'winding up' or liquidation of a company by its creditors, or individual creditor owed at less £750. The rest is negotiation or liquidation.

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