A winding-up petition is a formal application asking the court to order that a company is wound up.

Where a creditor presents the petition, the usual basis is that the company is unable to pay its debts.

If the court ultimately makes a winding-up order, the company enters compulsory liquidation.

This is different from a Creditors’ Voluntary Liquidation, where the directors and shareholders take steps to place an insolvent company into liquidation voluntarily.

A creditor is one of the parties that may petition to have a company wound up.

Common petitioning creditors include:

• HMRC
• Suppliers and trade creditors
• Landlords
• Lenders
• Other businesses or individuals owed money by the company

The Insolvency Act also permits petitions in certain circumstances by other parties, including the company itself and others with the necessary statutory standing.

A Scottish registered company can be wound up by the Court of Session or by a Sheriff Court with appropriate jurisdiction.

The correct court depends on the statutory jurisdictional rules and the particular circumstances of the company.

This is one of the important procedural differences between liquidation in Scotland and England and Wales.

There are several statutory ways in which a company can be shown to be unable to pay its debts.

One example is where:

• A creditor is owed more than £750
• A qualifying written statutory demand is served on the company
• The company does not pay, secure or satisfactorily resolve the debt within the statutory period

However, a statutory demand is not the only way in which inability to pay debts can be established.

Do not therefore assume that a creditor cannot present a petition simply because you have never received a document headed “Statutory Demand”.

The precise procedure depends on the court and the orders it makes, but the process can involve:

• The petition being presented to the appropriate Scottish court
• The court issuing directions for service, intimation and advertisement
• The petition being served on the company
• Advertisement in the Edinburgh Gazette and, where directed, another publication
• An opportunity for interested parties to lodge answers or otherwise appear in the proceedings
• A court hearing
• The court deciding whether a winding-up order should be made

The Scottish procedure should not be confused with the court timetable and Gazette rules that apply to English winding-up petitions.

Normally, yes.

Unless the court directs otherwise, a Scottish winding-up petition is advertised in the Edinburgh Gazette.

The court can also direct advertisement in one or more newspapers.

Publication is important because it makes other creditors and interested parties aware of the proceedings.

The petition itself is not filed at Companies House simply because it has been presented, but advertisement means the existence of the proceedings can nevertheless become publicly known before any winding-up order is made.

There are several reasons.

• The creditor is now actively asking a court to liquidate the company
• The petition can become publicly advertised
• Other creditors may become involved
• The company’s bank may become concerned about allowing further transactions
• Transactions after presentation of the petition can be affected if a winding-up order is later made
• A provisional liquidator may be sought in appropriate circumstances
• The court timetable may leave little time for directors to decide what to do

This is why a petition should be treated differently from an ordinary reminder, demand letter or threat of legal proceedings.

It can become a serious practical issue.

Under the Insolvency Act, if a winding-up order is ultimately made, certain dispositions of company property made after presentation of the petition are void unless the court orders otherwise.

Banks may therefore restrict or freeze a company account once they become aware of a winding-up petition because they do not want to facilitate payments that may subsequently be challenged.

This does not mean every bank account is automatically frozen at the precise moment a petition is presented. What happens in practice depends on when the bank becomes aware of it and the bank’s own procedures.

If the account has already been restricted, take urgent legal and insolvency advice before attempting to move funds through another account or a connected company.

The presentation of a petition does not itself instantly remove the directors from office or automatically make a winding-up order.

However, continuing to trade after presentation requires considerable care.

Directors need to consider:

• Whether the company remains able to trade lawfully and responsibly
• Whether continued trading is worsening creditors’ position
• What payments can safely be made
• The potential effect of the petition on dispositions of company property
• Whether the bank will continue operating the account
• Whether rescue, refinancing or insolvency options are still realistically available

Do not simply continue business as normal without addressing the petition.

This is one of the most important consequences of a winding-up petition.

If a winding-up order is eventually made, the compulsory winding up is generally treated as commencing from the date the petition was presented.

Section 127 of the Insolvency Act 1986 provides that dispositions of company property made after commencement of the winding up are void unless the court orders otherwise.

This means that payments and transfers made between presentation of the petition and the eventual winding-up order may later require careful consideration.

There are circumstances in which the court can authorise or validate particular transactions, but this is a legal process and should not be assumed.

If a petition has already been presented, take advice before making unusual, substantial or connected-party payments.

Sometimes payment or settlement may resolve the petitioning creditor’s position, but do not assume that paying that creditor automatically makes the proceedings disappear.

Once winding-up proceedings exist, other creditors can have an interest in them.

Scottish court procedure allows another qualifying creditor or contributory, in appropriate circumstances, to seek to be substituted for the original petitioner where, for example, that petitioner seeks to withdraw or no longer proceeds with the petition.

Before paying a petitioning creditor, establish:

• The exact petition debt and costs
• Whether other creditors are supporting the petition
• Whether the company can pay the creditor without simply creating a new insolvency problem
• Whether the proposed payment could itself create difficulty under the insolvency rules
• What formal steps are required to dispose of the court proceedings

Paying one debt is only a solution if it genuinely resolves the company’s wider financial position.