Creditor Winding Up Petitions – Remember “Substitution First, Standing Later”

We recently assisted a limited company seeking to resist a winding up petition that had been presented by a trade creditor in respect of an outstanding debt. Despite the petitioner’s debt and costs being discharged in full and an agreement being reached between the parties that the petition would then be dismissed with no order as to costs at the next hearing, a late complication arose in the form of another creditor belatedly filling a Notice of Support in relation to the existing petition.

The question therefore arose as to whether firstly, that supporting creditor was able to substitute as the petitioner in relation to the current winding up petition and secondly, whether that position changed if the company disputed all or part of the debt that was being claimed by that supporting creditor?

The recent judgment in Liberty Commodities Ltd –v- Citibank NA London & Ors [2023] EWHC 2020 (Ch) thankfully provides clear and timely guidance on these very points and in particular whether its “substitution first, standing later” or “standing first, substitution later” when a debt due to a supporting creditor is potentially disputed.

It is not uncommon for a company to be able to reach an agreement with a petitioning creditor following the service of a winding up petition. Following service of a winding up petition the petitioner must wait for at seven days before completing the further statutory requirement of advertising the petition in the Belfast Gazette. If a company which has been served with a winding up petition is able to discharge the petitioner’s debt in full then it is of course advisable to try and do so before the petition is advertised in the Belfast Gazette for two reasons:

  1. The Belfast Gazette is a publication monitored by banks and other financial institutions. The advertisement of a winding up petition having been presented against a company who is a customer of a particular bank will normally prompt the bank to take the prudent and protective step of freezing the company’s bank account and thereby create a significant practical difficulty with the company then being unable to make the desired payment to the petitioning creditor as well as severely affecting the company’s normal daily operational activities such as paying staff. In such circumstances the company may have to go to the trouble and expense of making a separate application to the Bankruptcy Court for a Validation Order to allow specific payments to be made out of the frozen bank account pending the dismissal of the winding up petition. Such an application will not be a mere formality and will understandably be given a great deal of scrutiny by the Court given the apparent financial difficulty that the company is experiencing.
  1. One of the purposes served by the advertisement of the winding up petition in the Belfast Gazette is to alert other interested parties to the existence of the petition and the very real threat that the company in question may be shortly placed into compulsory liquidation. Interested parties are invited to make themselves known to the petitioning creditor if they wish to support or oppose the existing petition. This then leads to the possibility of any other creditor formally supporting the current petition and, in the circumstances described above, applying to the Court to be formally substituted as the petitioner if the existing petitioning creditor has since been paid and wishes to have its petition dismissed. If the application to substitute is ultimately granted by the Court then that will essentially keep the current petition alive and maintain the threat of compulsory liquidation hanging over the company. Furthermore the considerable practical impediments in operating the company’s bank account will remain in place until the petition is actually dismissed.

If a petitioning creditor has been paid in full before it has placed the advertisement in the Belfast Gazette it is possible for the petitioner to apply to the Court on an ex parte basis for leave to withdraw its petition under Rule 4.015 of the Insolvency Rules (Northern Ireland) 1991 but the Court will only entertain such an application if:

  1. The petition has not been advertised, and
  2. The petitioner has not received any notices in support or opposition of the petition, and
  • The company consents to the order being sought.

However, if the petition has already been advertised then the only option is for the parties to attend the scheduled hearing of the petition and seek an order from the Court that the petition can be dismissed.

At this scheduled hearing, the petitioner must first provide the Court with a list in the prescribed format of any creditor or party who has provided them with notice of their intention to support or oppose the petition and this then effectively allows any supporting creditor to attend that hearing and make representations to the Court to include an application to be allowed to substitute as the petitioner.

Under Rule 4.019 the Court can substitute as petitioner any creditor whom it deems has a right to present a petition as long as that creditor was in a position to present its own petition at the date the current petition was issued, being the date the current petition was actually stamped by the Court.

The fact that the company may dispute part or all of the supporting creditor’s debt will not of itself prevent the Court from first allowing that creditor to essentially take over the carriage of the current petition under the “substitution first, standing later” principle.

Currently in Northern Ireland non-Crown creditors are required to first obtain a judgment before embarking on the winding up process and any such disputes should therefore have already been aired during the course of those judgment proceedings, however that will not always be the case especially with judgments obtained in default where the company now claims that it was not properly served.

Finally, whilst substitution of the petitioner has an obvious detrimental impact on the company, it is also worth remembering that it could also potentially have an impact on the original petitioning creditor who may have long since removed themselves from the proceedings having successfully obtained payment. If the company is subsequently wound up on the supporting creditor’s petition then it is likely that any future liquidator will have to consider whether the payment made to the previous petitioner was actually a “preference payment” as defined by the insolvency legislation and if so, take the necessary steps to have the payment returned to the company’s estate so that same can be administered together with all of the company’s other assets in accordance with the statutory distribution rules which requires the same class of creditors to receive payments on a pro rata basis.

According to the formal insolvency statistics published by the Government, financial pressure continues to grow on businesses throughout the jurisdiction and it is therefore imperative that companies are alert to the perils and difficulties of being served with a winding up petition and act swiftly to take professional insolvency advice as early as possible.

At Millar McCall Wylie we work closely with a large established network of local insolvency practitioners who can assist companies in financial distress by identifying the most appropriate restructuring and formal insolvency processes depending on your company’s circumstances. Our solicitors regularly advocate in the Bankruptcy Court within the High Court in Belfast and can represent your company in respect of any winding up or other insolvency proceedings that you are a party to. Similarly we are best placed to advise and assist creditors who have outstanding liabilities from companies which appear to be in financial difficulty or subject to insolvency proceedings. If you are concerned about your own company or indeed a company that is indebted to you then please contact Jason Byrne in our Insolvency & Restructuring Team.