As a company director, how should you react to a winding up petition? No senior manager or director in a business should try and hide the fact that the business is heading for insolvency. If it is, then at least one if not more creditors will be issuing threatening letters, phoning the company repeatedly and trying other ways to get their money back. The best course of action is to contact them, explain the problems the company is experiencing and try to reach an informal agreement to repay the debt in a way that the company can afford and the creditor is prepared to accept. Eventually creditors may resort to a formal Demand for Payment, giving the company 21 days to settle their debt. If this fails, and the debt is at least £750, an application could be made to the County Court for a Judgement, or to the High Court for a Winding up Petition. A business must understand that most creditors use Winding up Petitions as a very last resort only after other approaches have failed. One of the reasons is the expense involved:
- Court fees of up to £280 to make the petition;
- A court deposit of £1350;
- Legal fees of approximately £750; and
- The likelihood that if successful the creditor may only get a few pence for each £1 owed.
Not surprisingly, in some cases the cost of the petition exceeds the debt. Companies should be aware that Her Majesty’s Revenue and Customs (HMRC) often have recourse to Winding up Petitions to recover
tax or VAT debt.
Winding up Petitions – the process
It is in a company’s best interests to do whatever it can to prevent a creditor applying to the Court for a Winding up Petition. If the Court decides in favour of the creditor, the creditor’s expenses in raising the petition will be added to the debt. If A Demand for Payment does not result in the settlement of the debt within 21 days, the stages of a Winding up Petition are as follows.
- A creditor petitions the Court and places an advert in the London Gazette:
- The Court considers the petition and if it agrees sends it on to the business responsible for settling the debt.
- The company responsible for the debt has 7 days to respond.
- After 7 days the Court can issue a Winding up Order.
Banks Freeze accounts
Banks monitor the London Gazette. When a notice about a Winding up Petition relating to one of their customers appears, they are likely to freeze the accounts the business holds with them to prevent
the depletion of assets. This will make it virtually impossible for the company to continue trading and is one of the reasons a company should do all in its power to prevent a Wind up Petition being
The Vital 7 days
Between receiving the petition and the seven day deadline elapsing the company must act. There are four options open to them:
- Begin the process that will lead to the setting up of a Company Voluntary Agreement (CVA);
- Apply to the Court for an adjournment so that the company can explore options, including the possibility of administration,
CVA or voluntary liquidation or they could, for example, employ a Business Recovery Specialist to try and restructure the company. If the
company is placed into Administration before the winding up order is made that will effectively halt any legal actions for debt recovery, and prevent any new ones.
- Ask the Court for an adjournment and demonstrate that the company needs more time to consider it's position and propose a solution. It can also ask the Court to stop the creditor issuing any adverse publicity for the duration of the adjournment; and
- Raise the amount owed by what ever legal means are available, such as asset financing, and settle the debt.
When A Winding up Petition is Made
Once the Court has issued a Winding up Petition there are fewer options open to the company. They can:
- With the agreement of creditors, undertake a Creditors’ Voluntary Liquidation. The business will cease trading and
it's assets will be sold. The proceeds of the sale will be used to pay creditors;
- Set up a Company Voluntary Arrangement; or
- Plan legal action to challenge the decision.
Entering into Administration
When a company is experiencing problems, perhaps with cash flow or by failing to service debts during a downturn in trade, entering the administration process can be a good solution. An Administrator will examine the business; their primary intention will be to safeguard the interests of creditors. Rather than automatically winding-up the business the Administrator will consider any other options which are more likely to achieve that aim. If restructuring, redundancies and rescheduling of credit are not options, the business will probably close and
it's assets be sold.
The Company Enters Liquidation
Once a company enters liquidation the Official Receiver is notified
and appointed as Liquidator. They will have the assets valued and put up
for sale. During this period, a report will be compiled on the actions of directors of the company. Any director found to have acted improperly could be disqualified from being a director for up to 15 year and/or become personably liable for some of the company’s debt.
Company Voluntary Arrangements
Greater cash flow from a reduction in credit payments can remove some of the problems a business in trouble is struggling to overcome and enable it to trade profitably. In these circumstances a Company Voluntary
Arrangement (CVA) is likely to be the best option. A CVA enables a company to make a formal agreement with its creditors to pay off a percentage of its debts over a period of between 3 and 5 years. It can take between 4 and 8 weeks to set up a CVA.
A proposal must be made to creditors by an Insolvency Practitioner, a
creditors meeting is held, and a vote is taken in which at least 75% of creditors must vote to accept the proposal. A CVA:
- Is legally binding;
- Stops any further action by unsecured creditors;
- Allows the company to continue trading; and
- Provides time for the business to restructure and become profitable again.
In the case of small to medium sized businesses a Licensed Insolvency Practitioner must set up and supervise the CVA.
CVA Set Up
Once a CVA is set up, the company will pay a monthly amount, as agreed through their supervisor (the Insolvency Practitioner). After deducting their costs, the Insolvency practitioner will distribute the balance to the creditors.