Using winding-up petitions to recover debts

The effect of a winding-up order will be the appointment of a liquidator and, ordinarily, the closure of the business. A winding-up petition can often be quicker and more cost-effective than seeking a county court judgment, making it an effective debt recovery tool. However, the following pitfalls can apply:

• The debt must not be subject to a genuine dispute or cross-claim. If it is, you could face an injunction and/or the dismissal of the petition, together with a significant costs order.
• Once third parties become aware of the existence of the petition, the debtor’s bank accounts will typically be frozen and it will find it difficult to trade, which could further reduce its prospects of paying the debt.
• If other creditors become aware of the petition, they could file notices in support and ask to take over carriage of the petition in the event of you no longer wishing to proceed. This could make agreeing a settlement more difficult and risky, because a liquidator could seek to ‘unwind’ the settlement payment and recover it from you.
• If a company is genuinely unable to pay its debts, a winding-up order could be made and you may not receive anything at all (only your costs, but not the debt itself, would be paid ahead of other creditors).