Court treatment of winding-up petitions during administration

If a company enters administration, any pending winding-up petition will be impacted, dependant on the method through which the administration is initiated.

Modes of entering administration

A company may enter administration via one of two primary routes: by court order or by an out-of-court appointment, typically by a qualifying floating charge holder, under Schedule B1, paragraph 14.

Pursuant to paragraph 40(1) of Schedule B1 (Insolvency Act 1986), “a petition for the winding up of a company (a) shall be dismissed on the making of an administration order in respect of the company and (b) shall be suspended while the company is in administration following an appointment under paragraph 14.”

Accordingly, if a company enters administration through an out-of-court route, the petition is suspended for the duration of the administration. In contrast, a court-ordered administration results in the dismissal of the petition.

Suspension under paragraph 40(1)(b)

Suspension effectively puts the winding-up petition on hold. It has no legal effect during the administration and no winding-up order should be made. However, the petition is revived once the administration ends.

This principle was affirmed in Re J Smiths Haulage Ltd [2007] BCC 135, where a winding-up order was mistakenly made despite the company having entered administration. The court acknowledged that such an order could be rescinded in these circumstances.

It should also be noted that any payments made during a suspension remain valid as set out in section 127(2) of the Insolvency Act 1986 as section 127 “has no effect in respect of anything done by an administrator of a company while a winding-up petition is suspended under paragraph 40 of Schedule B1.”

Dismissal under paragraph 40(1)(a)

A dismissed petition is automatically terminated and cannot be revived. As no winding-up order may be made on its basis, there are no void transactions pursuant to section 127 of the Insolvency Act 1986.

Supporting authorities

The distinction between paragraphs 40(1)(a) and 40(1)(b) has been consistently upheld in cases such as the following:

1. Ahmed Khawaja (as Director of Allied Wallet Limited) v Financial Conduct Authority [2019] 8 WLUK 270 wherein the Court of Appeal confirmed the mandatory nature of dismissals under paragraph 40(1)(a);
2. John Harlow (Administrator of Blak Pearl Ltd) v Creative Staging Ltd [2014] EWHC 2787 (Ch) during which the statutory distinction between dismissal and suspension was affirmed (noted at [6]–[7]); and
3. Neumans LLP v Andronikou (Re Portsmouth City Football Club Ltd) [2013] EWCA Civ 916, in which the High Court described paragraph 40(1)(b) as providing for automatic suspension.

Judicial discretion under section 125

Despite the seemingly mandatory language of paragraph 40(1)(b), other cases demonstrate how the court retains discretion by virtue of section 125 of the Insolvency Act 1986 which provides that “[on] hearing a winding-up petition the court may dismiss it… or make any other order that it thinks fit.”

This provision has enabled courts to dismiss a petition even where it would otherwise be suspended under paragraph 40(1)(b), especially when doing so aligns with the interests of the parties and creditors.

Case study: Re Marden Homes Ltd

Marden Homes Ltd (the “Company”) was listed to be wound up on 23 October 2024 following a petition by Avoncross Ltd (the “Petitioner”). Before the hearing, on 21 October 2024, the company entered administration via the out-of-court process under paragraph 14.

At the hearing, the Petitioner sought dismissal of the winding-up petition notwithstanding the apparent operation of paragraph 40(1)(b). While ICC Judge Barber acknowledged that the provision was mandatory on its face (“shall be suspended”), she held that section 125 remained relevant.

Taking into account that the petitioner did not wish to proceed, and that dismissal would better protect the interests of creditors, the court exercised its discretion accordingly.

With this in mind, Barber J concluded that “the purpose of the [relevant provisions] is to ensure protection for creditors as a whole… and also to ensure that the petitioner does not find itself de-crowned permanently, should it wish to resume the petition following the expiry of the administration. The court should take into account that the petitioner does not wish to continue with its petition, so I decide that the court can exercise its power to dismiss.”

Conclusion

The consequences of entering administration on a pending winding-up petition are dictated by the route into administration:

Mode of Entry and Effect on Petition Legal Authority

Court order (para 12) Dismissal Sch. B1, para 40(1)(a)

Out-of-court (para 14) Suspension Sch. B1, para 40(1)(b)

However, under section 125, the court retains the discretion to dismiss a suspended petition where appropriate, particularly where the petitioner consents and dismissal serves the collective interests of creditors.