Threatening a winding-up petition as a means of collecting a debt from a corporate debtor is a powerful tool but carries with it many risks. The mere threat of a winding-up petition can be enough to elicit a response from your debtor as the publicity involved in a winding-up petition can be devastating to a business, but before you consider using such a threat make sure you are fully aware of the key risks. An ill-advised winding-up petition can lead to injunctions against the issuer and a hefty order for costs.

How a winding-up petition works: A winding-up petition applies to companies rather than individuals. First a Statutory Demand is issued to the debtor. The debtor then has three weeks to pay or respond. If they do not you can issue a winding-up petition.   If you follow the procedure and the court finds in your favour then the debtor will be compulsorily wound up. It is important to remember that just because you issued the petition it does not mean that you have any priority over what funds may become available, and it is possible you might not even cover your costs. The key risks with this process are:

Abuse of process: Although a winding-up petition is a common tool in debt collection, the process was not designed for this purpose. It is possible that a court could find that you have abused the process of court and may dismiss your petition and make you liable for any of the debtor’s costs.

The company may cease trading: Remember if the debtor is unwilling rather than unable to pay, the threat of a winding-up petition could be enough to persuade it to settle your debt first. However if it simply cannot pay its debts, the issuing of the winding-up petition will not improve this position. In fact the threat could be enough to drive the company into an insolvency process. This will have the effect of crystallising your losses and the return on your debt is likely to be minimal.

Damaging your relationship: Consider whether the long term damage to your relationship justifies the payment in the immediate term.

The company calls your bluff: If the company ignores your threat but you do not issue the petition your credibility and that of any further threats which you make will be damaged. This could have the effect of pushing you further down the company’s list of priorities.

Is your debt undisputed? You can only validly issue a winding-up petition for money if the debt is indisputably due to you. A winding-up petition issued for a disputed sum is an abuse of the process of court. A standard response to a threat of a winding-up petition is to say it is disputed in the hope that you change your mind rather thank risk petitioning for a genuinely disputable debt.

Cross-claims:  If there is a cross-claim of substance which exceeds the debt owed to you, the court will only allow the winding-up in very exceptional circumstances.

Payment to you could be void: If the company pays you after you or anyone else has presented a winding-up petition that payment will become void if the company is later wound up because of that petition. The usual process is for the petitioning creditor to apply to withdraw the petition on being paid. The court will allow this if no other creditors have indicated that they support the petition and remain unpaid.

The content of this Business Briefing is for information only and does not constitute legal advice. It states the law as at February 2015. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this briefing.