A winding up petition is a petition to bring the life of a company to an end. From the point of view of a creditor (person/company to whom money is owed), commencing winding up proceedings should be regarded as a last resort.

Under section 122 Insolvency Act 1986 (“IA 1986”), there are certain prescribed circumstances in which a winding up petition can be filed with the court. One of those prescribed circumstances is when a company is unable to pay debts in excess of £750.

During winding up proceedings, the court will only consider whether one or more of the prescribed circumstances under section 122 Insolvency Act 1986 has been satisfied. When a debt is disputed, a winding up petition should not be filed, as the court will not attempt to resolve the dispute prior to considering whether the company is unable to pay its debts.

There is long-standing case law addressing the issue of filing a winding up petition when the debt is disputed. In the majority of cases, the courts will strike out a winding up petition if the company subject to the petition has substantial grounds in which to dispute the debt.

However, there are exceptional circumstances when a Court will not strike out a winding up petition relating to a disputed debt, even if the company subject to the petition has substantial grounds in which to dispute the debt.

In the case of Lacontha Foundation v GBI Investments [2010] EWHC 37 (Ch), the court decided that exceptional circumstances in which a winding up order shall be granted in relation to disputed debts, includes where:

  • there was no adequate alternative remedy for the creditor;
  • the company would not be solvent, even if the court was to disregard the petition debt; or
  • the court considered that winding up the company would cause no prejudice to the company.

Unless there are exceptional circumstances, the courts generally considers the filing of a winding up petition in relation to a disputed debt as a debt collecting exercise and an abuse of process.

Despite the case law on winding up petitions relating to disputed debts, petitioners will still file winding up petitions, as they know that by filing and serving a petition upon a company, the company subject to the petition will feel pressured and may pay the disputed debt, in order to avoid the negative stigma and potential harm caused by winding up proceedings.

Upon receiving a winding up petition, a company has a limited amount of time to respond in order to avoid consequential damage from the winding up proceedings. One method in which the company can respond is by making an urgent application to prevent the advertisement of the petition and strike out the winding up petition.