Reviewed 5th February 2024
The winding up procedure, also known as Compulsory Liquidation, is the process of forcing a company to close when it cannot pay its debts. A creditor, such as a supplier or HMRC, can take this action against a company that owes it money.
The creditor begins the process by issuing the company with a Winding Up Petition. If the company does not challenge the petition or pay the amount it owes, the court can make a Winding Up Order to force the company into Liquidation.
Once a Winding up Order has been made in Scotland, the consequences are usually permanent. However, progressing from a Winding Up Petition to a Winding Up Order is not a foregone conclusion. You can stop the petition, but you must act now.
A Winding Up Petition is an application made to the Court of Session in Edinburgh or the local Sheriff Court (depending on your share capital), usually by a creditor, to seek to close a company down. Other parties, such as shareholders or the company itself, can use this process. However, petitions are most commonly issued by creditors such as banks, HMRC and trade suppliers who are owed at least £750 in undisputed debt.
Choosing to issue a Winding Up Petition is a method of last resort for most creditors, and will usually follow numerous requests for payment that have been ignored. Many creditors will choose to issue a Statutory Demand for the repayment of the debt first, but they do not have to.
The court will consider the petition, and if it’s satisfied that the company is insolvent and cannot pay its debts, it will make a First Order to serve and advertise the petition. At this point, the petition will become public knowledge and your company bank accounts will be frozen, making the situation even more difficult to resolve.
Once the petition has been served, you have eight days to lodge answers. If you do, the court will set a hearing to determine whether to grant the Winding Up Petition. If you don’t lodge answers or pay the debt, a Winding Up Order will be made and an Insolvency Practitioner will be appointed to act as the interim liquidator and wind up the company’s affairs.
The main difference between the Winding Up Petition process in England and Scotland is that, in Scotland, you have less time to save your business. In Scotland, as soon as a Winding Up Petition is granted, it is advertised. Your bank accounts are then frozen, which makes it more difficult to prevent the closure of your business.
Given the speed of the process in Scotland, it’s best to act before it gets that far. If you are issued with a Statutory Demand by a creditor, you have 21 days to pay the debt in full, challenge the demand or negotiate an agreement with the creditor. You could also consider formal insolvency procedures such as a Company Voluntary Arrangement (CVA) or putting the company into Administration.
Another option is to lodge a ‘caveat’ with the court before the petition is issued. Lodging a caveat provides some protection, as you will be informed of the petition before the Judge or Sheriff decides on the application. That gives you more time to take pre-emptive action and allows you to make representations to the Judge before the petition is granted or made public.
If you do not have a caveat and it has been more than 21 days since you were issued with a Statutory Demand, the creditor can petition the court. If the court grants the petition, you have eight days to ‘lodge answers’, which simply means submit your defence.
At this point, there are several things you can do to prevent the petition from becoming a Winding Up Order. You can:
If you lodge answers, a court hearing will be set to hear the arguments of both parties. If you do not lodge answers or make an arrangement with your creditor, the court will decide to wind up the company, a liquidator will be appointed and the company will be dissolved after around three months.
As a company director, you must always be aware of the business’s financial position. If you find yourself in a situation where you are unable to pay your debts, particularly if you have been issued with a Statutory Demand, that is a clear sign that you need professional help.
By acting early, you can prevent a Winding Up Petition from being issued and give your business the best chance of making a recovery. Even if your business is no longer financially viable, at least you can close the company on your own terms by liquidating it voluntarily rather than being forced to close by a creditor.
If you’ve been threatened with or issued a Winding Up Petition in Scotland, contact our team of business debt experts immediately. We offer a free, same-day consultation and can give you the honest, independent and experienced advice you need to navigate this situation.
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