Compulsory Liquidation - Winding Up Petition
Companies who fail to pay their creditors on time run the risk of being placed into Compulsory Liquidation by way of a winding up petition.
Whilst some creditors use the threat of compulsory liquidation as part of their debt collection process, others wish to see an investigation into the financial affairs of a company to identify whether there are any assets available for creditors or there is a case for bringing actions against the directors. Not surprisingly HMRC is the largest single petitioning creditor as companies find it difficult to keep up with existing ‘Time to Pay’ arrangements, or are unable to secure new agreements.
What does Winding Up mean?
A compulsory liquidation or winding up occurs when a company is wound up by an order of the Court. The most common reason for a company being wound up is when a winding up petition is presented to the Court on the grounds that the company is unable to pay its debts as and when they fall due.
The petitioning creditor can be any creditor who is owed more than £750 and who can show they have taken reasonable steps to try to collect the amount due to them. They may, for example, have an unsatisfied judgment or unpaid statutory demand which has not been set aside.
Once the petition has been filed, the Court will issue a hearing date at which the winding up order will be considered. The petition must be served on the company at least seven business days before it is advertised in the London Gazette so as to give an opportunity to the company to settle or otherwise deal with the petition. Furthermore, the advertisement must be published no later than seven business days before the court hearing at which time the petition then becomes public knowledge. Advertising between these dates is at the discretion of the petitioning creditor.
Advertisement of the petition will have very serious consequences for the company and its directors and any petition received should be dealt with as a matter of extreme urgency. In particular, once the winding up petition is advertised, the company’s bank accounts will be frozen, which will have a direct impact on the company’s ability to continue to trade and pay wages and salaries. Also any sale of the company’s property or changes as regards its shareholding during this period will be void if the company is subsequently placed into liquidation.
Action to take after receiving a Winding Up Petition
Once a winding up petition has been received time will be of the essence to prevent the petition being advertised. Once advertised the petition must be heard by the Court and even if the petitioner has been paid, another creditor can stand in or be substituted for the petitioning creditor and ask the Court to continue with the petition.
On receiving the petition the directors must reassess the overall financial position of the company and take the required action. Our Licensed Insolvency Practitioners are able to assist directors in considering their options which may include the following:
- Pay the debt and costs in full
- Reach an agreement with the creditor to settle the debt or repay over a period of time
- If there is a genuine dispute, contest the petition. A witness statement in opposition must be filed in Court no less than five business days before the date fixed for the hearing
- Placing the company into an alternative insolvency procedure, such as a Company Voluntary Arrangement or Administration, which may allow the directors to retain control of the business and maximise realisations
- Placing the company into a Voluntary liquidation
- Allow the company to be wound up and to cease trading.
Whatever action the directors choose to take it is imperative that they do so as a matter of urgency.
The Winding Up process
Once the winding up order is made by the Court, the Official Receiver acts as liquidator unless he is replaced by a licensed insolvency practitioner. The powers of the directors are immediately terminated. The liquidator has wide powers which include closing the business, selling the company’s assets, bringing and defending legal actions and paying dividends to the company’s creditors.
The liquidator also has considerable powers of investigation into the affairs of the company and the conduct of its directors. He/she will consider whether the directors have acted responsibly and whether there is a case for wrongful trading, breach of fiduciary duties, or misfeasance, which could result in the directors being personally liable for the debts of the company. A report on the conduct of the directors is also submitted to the Insolvency Service in respect of potential disqualification proceedings.
How we can help
The consequences of receiving a winding up petition are very serious for a company. It is crucial that directors react and deal with the service of a petition as a matter of urgency and seek professional insolvency advice on the options available for the company and the responsibilities of the directors. Our initial meeting to consider your options will be free of charge.