Winding-Up Petitions: The Continuing Duty Not to Mislead the Court

Winding-up is a class remedy instigated against companies that cannot pay their debts as they fall due. It is well settled that the Court retains a discretion as to whether to make a winding-up order even if the debt is undisputed and the debtor company cannot pay.

In the exercise of that discretion the Court relies upon the parties, and in particular the petitioner, to ensure that all material matters are properly brought to its attention.

Although winding-up proceedings do not attract the same duty of full and frank disclosure applicable to without-notice applications, petitioners (and their advisors) are under a continuing obligation to ensure that the Court is not misled in any material way.

That obligation arises from the Court's insolvency jurisdiction, its discretion under section 125 of the Insolvency Act 1986, and its power to prevent abuses of process.

Nature of the petitioner’s obligations

Petitioners are under a continuing obligation to ensure that the Court is not misled. They must therefore ensure that the facts stated in the petition are accurate and that the Court is provided with all information material to the exercise of its discretion that comes to light prior to the final determination of the petition.

As a matter of best practice, prior to each substantive hearing or procedural step, petitioners should undertake a fresh assessment of whether: (i) the court has been provided with all material information; and (ii) the insolvency jurisdiction remains the appropriate forum for determination of any issues that have arisen.

What must be disclosed?

Issues that ought to be disclosed include anything that could reasonably be expected to influence the Court in the exercise (or not) of its discretion to make a winding-up order. By way of a few practical examples, petitioners would be well advised to tell the Court about any:

· Genuine Disputes – if the debt becomes disputed on substantial grounds the petitioner should inform the Court of that fact particularly in cases where the debtor company has not put the Court on notice of the dispute.

· Partial Payment, Security or Settlement Proposals – if circumstances change between the issue of the petition and the final hearing the petitioner should update the Court.

· Disagreements as to the identity of any proposed liquidator – the petitioner should update the Court as to any views expressed in this regard (particularly in the circumstances set out in section 140 of the Insolvency Act 1986).

Practical Risks

The consequences for getting this wrong could include:

• Dismissal or adjournment of the petition;
• Adverse cost consequences for the petitioner;
• Findings that the petition constitutes an abuse of process; and
• Reputational damage for the petitioner and its advisors.

Conclusion

Circumstances can and frequently do change between presentation of a petition and the final hearing. Regular review of the underlying facts, coupled with prompt disclosure of material developments, will help preserve the integrity of the insolvency process while reducing the risk of adverse costs consequences, allegations of abuse of process and judicial criticism of the parties.