Essential Guidance to the Issuing or the Receipt of a Company Winding Up Petition
A winding up petition is a formal court application made by a creditor seeking to place an insolvent company into compulsory liquidation on the basis that it is unable to pay its debts.
The number of companies, private businesses and individual traders facing insolvency remains high, reflecting pressures such as rising National Insurance Contributions, increases in the national minimum wage, and the higher cost of borrowing, amongst others.
An inevitable consequence of such high levels of debt is that creditors will pursue recovery of the sums owed, which may result in the issue of proceedings in the civil courts, alternatively, the threat of liquidation, including the service of a winding-up petition.
The receipt of a winding up petition will not only cause significant stress for a company’s director(s) but also serve as a clear indication that the company’s future may be in jeopardy.
The law which regulates the winding up of companies is extremely comprehensive and complicated, there are also extremely important commercial considerations before such procedure is commenced.
The team at KANGS regularly advises both corporate and individual clients who wish to recover debts by way of a petition, as well as those who have been served with one and are seeking advice and guidance on how to oppose it.
Stuart Southall of KANGS provides a general outline.
What is a Winding Up Petition?
As mentioned above, a winding up petition against a company is an application made to the appropriate court which, if it proceeds to conclusion, will result in the company being liquidated and removed from the Register of Companies, which is maintained at Companies House.
Upon liquidation, the company assets will be collected by the liquidator, and creditors will be repaid, to the extent that the amount of funds recovered allows, in a specified statutory sequence. Secured and preferred debts, including HMRC, and costs are paid first, with any remaining funds being distributed pari passu (equal footing), amongst the other creditors.
Additionally, the liquidation may result in civil and criminal procedures being pursued should the actions of any individual(s) involved in the accumulation of the debt justify the same. Where company directors are involved, director disqualification proceedings may be commenced to prevent future involvement in the administrative process of any other company for a specified period.
Creditors | Issuing a Winding Up Petition Seeking the Recovery of Debt
Initial Procedure
It is not normally the case that directors are unaware of the extent of debt owed by their company, and they will be aware of existing of pressure from one or more creditors to repay all or part of such debt.
However, such need to promptly address payment will be emphasised by the receipt of:
A Statutory Demand
Following receipt of a statutory demand for payment, the debtor has twenty -one days in which to pay the debt or reach an agreement acceptable to the creditor for payment.
If there is no response or agreement, winding up proceedings may be commenced.
A Letter before action
A letter before action will request payment of the debt, or satisfactory proposals for settlement, within a stipulated period, failing which further recovery steps, which may or may not be stipulated, will be commenced.
If either of these courses of action fails to result in proposals for the immediate payment, instalment payments or other settlement proposals satisfactory to the creditor, then there may be no other option than to consider issuing civil court debt recovery proceedings or a winding up petition.
Precautionary Consideration of the Immediate Consequences of Issuing a Petition
If a company owes seven hundred and fifty pounds or more, a creditor may issue a winding up petition which will be endorsed with a Court Hearing Date and served at the registered office of the company.
Proceeding by way of a petition represents an expensive option for a creditor and, save where the debt is of such an amount that the likelihood of it being paid is slim and the intent is, predominantly, to achieve the liquidation of the debtor, other recovery procedures may be favourable, particularly after consideration of the following.
After a period, the petition will be advertised in The Gazette, which may produce the following consequences:
- having become public knowledge, other creditors will be aware of the apparent financial troubles of the debtor company. This may well result in the potential level of debt being chased by several parties making it impossible for the debtor company to conduct any form of settlement negotiation to secure a route through its financial issues,
- even if the petitioning creditor decides, with hindsight, not to continue with the petition, as it will be evident that it will not result in a substantial recovery of the debt and wishes to pursue another recovery route, other creditors may choose to ‘adopt’ the petition and continue with it, which will probably render any proposed pursuit of an alternative recovery method by the petitioning creditors, pointless,
- it is quite likely that HMRC will be seeking recovery of its debt which will be paid preferentially to other creditors,
- the courts do not regard the issue of a petition as a debt recovery process believing that a company which cannot immediately pay its debts should be wound up as quickly as possible and this will be its policy at any Hearing.
Accordingly, the costs of issuing, serving and advertising a petition together with the prospects of other creditors, including preferential creditors such as tax liabilities due to HMRC, potentially ‘soaking up’ any funds recovered may render it pointless to proceed by way of a petition.
Debtors | Steps to be Considered Upon Receipt of a Petition
The overwhelming consideration is very much as mentioned above, that once a petition has been advertised, it is incredibly difficult to defeat a winding up petition where there is considerable debt, an array of anxious, worried creditors and a substantial presence of HMRC.
However, where these factors are not present, the debt is manageable and any other creditors are prepared to engage in an agreed form of repayment scheme, a prompt and pro-active challenge to the petition may be achievable.
Upon receipt of a petition to wind up your company, it is absolutely essential that immediate experienced legal advice and guidance is obtained.
In the critical period before the petition is advertised a number of steps may be appropriate such as:
- discussing with the petitioning creditor an agreed moratorium for advertisement,
- negotiating repayment of the debt,
- seeking a court injunction preventing the advertisement especially where, for instance the petitioner appears to be acting out of malice,
- contacting other creditors evidencing the company’s ability to trade through the prevailing issue and seeking agreement to oppose the petition at court, if necessary,
- approaching any particular debtor(s) of the company encouraging payment of their debts which are the cause of any cash flow problem,
- discussing the position with the company’s bankers.
How Can We Assist You?
If any of the issues explained above affect you, please ensure that you contact us immediately. The team at KANGS can provide advice and representation in relation to Bankruptcy Petitions and Winding Up Petitions as well as wider insolvency matters.
If we can be of assistance, our team would be delighted to assist you, simply contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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