A Winding Up Petition is the most serious action a creditor can take against a Company; by petitioning to liquidate (liquidation is the process of bringing a business to an end and distributing its assets to claimants) the company as it is unable to meet its liabilities as and when they fall due.
Unless steps are taken to quickly deal with the petition, the petitioning creditor – which in the majority of cases is HMRC – can proceed to advertise the petition which can alert other creditors to its existence and stir them into action too. For example, when the Company’s bank becomes aware of the petition, they will take steps to freeze the company’s bank accounts.
It is unlikely for a Winding Up Petition to have been served out of the blue; ideally company directors should have identified the potential onset of formal insolvency before the petition was served. In addition, directors will now find themselves in the involuntary position of allowing creditors to force the company into compulsory liquidation instead of taking action themselves to select the most suitable option on their terms.
From the date of the petition the seven-day countdown begins to pay the amount owed or mount a defence.
- If the Company appoints an IP they could propose and negotiate a Company Voluntary Arrangement (CVA). If the business appears to be viable, this offers the creditor a proportion of the debt over a longer period of time, and allows the company breathing space to turn the business around.
- Apply for an adjournment of proceedings so that the Administration route can be considered.
- The directors could voluntarily have the company placed into Administration – this would prevent a Winding Up Order being issued by the courts. Company assets would be valued and sold by an appointed administrator to cover some or all of the debt.
- The company could simply pay all monies due to the creditor, perhaps using asset-financing as a way to raise the funds.
- Where a realistic dispute of the debt is an option.
- An injunction could potentially be sought to either postpone or prohibit the petition being advertised in the London Gazette. This would prevent other creditors becoming aware of the situation, an important point as the banks keep track of these adverts and would freeze all company accounts.
A company may be issued with a Winding Up Petition if more than £750 is owed to a creditor. It is likely to be a last resort for the creditor, however, as fees charged for issuing a Petition are high. Currently standing at £1,490£1,990.
This is the general timeline of events once a Winding Up Petition has been sent by a creditor:
- The petition is served at the company’s registered address, and a date set for the hearing.
- From this point, company directors have exactly one week in which to act, otherwise the petition will be advertised in the London Gazette, alerting banks to the situation. The bank will then freeze the company account to prevent the disposal of assets, effectively stopping all trading.
- If the week passes without change, the court will issue a Winding Up Order, the company will be liquidated, and the directors will have no further influence on proceedings.
- Once a Winding Up Order has been issued, company assets will be valued and sold.
The liquidator must also investigate the actions of company directors in relation to how the business was run. In some cases, the directors may face accusations of misconduct if they have continued to trade despite being aware of company insolvency issues. In these instances, directors may become personally liable for company debts incurred from the date they knew about the insolvency.
If company directors are found guilty of misconduct, the result can be fines and/or disqualification from being a limited company director in the UK – this ban can last for up to fifteen years. In serious cases of misconduct, directors could face imprisonment.
It is likely that a company will be aware that a winding up petition may be imminent, if for no other reason that someone has served a “Statutory Demand” on the Company, so it’s imperative that the company reacts quickly to the service of a winding up petition.
Acknowledgement: Information provided by Begbies Traynor Group PLC
NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is firstname.lastname@example.org.