Managing a company on the brink of insolvency is not an easy task. Not only must directors be concerned with improving their company’s finances, but they must also balance the interests of company’s creditors. Outstanding creditors will often apply additional pressure on directors through a number of means, including a winding up petition.
Winding up petitions are a serious threat to directors of struggling companies. Essentially, they allow creditors to begin the process of compulsory liquidation if a company has fallen behind on its debt payments. While winding up petitions are not always used, they can be used by creditors who feel it is the best way for them to get their money. A question we have been asked is: how can directors stop a winding up petition from HMRC?
In this article, Clarke Bell will answer this question, break down the winding up procedure, and outlining what you can do about it.
What is a winding up petition?
A company’s creditors can initiate a winding up petition as a means of debt recovery. In short, it begins the process of compulsory liquidation by petitioning the courts to step in. Should a winding up petition be approved, a court hearing will be arranged, and both parties can state their case. Assuming creditors have lodged the petition correctly, and the company truly cannot pay its debts, the court will issue a winding-up order. This effectively orders the company into compulsory liquidation, resulting in the closing of the company, the disposal of its assets, and the payment of creditors from any proceeds.
While a winding up petition can be an effective way for creditors to recover some of their debt, it is not an easy process. It will require a good deal of time and effort from creditors, and the process often cannot ensure all creditors will receive the full amount owed. Additionally, creditors must first serve a Statutory Demand before they even consider a winding up petition. As such, winding up petitions are typically treated as a last resort.
What is a Statutory Demand?
A winding up petition cannot be served until a Statutory Demand has been elapsed. Statutory Demands can be seen essentially as a prelude to the serving of a winding up petition. Any of a company’s creditors can serve them, provided the debt is less than six years old. Once served, the company will have 21 days to either pay the debt in full, or reach an agreement with the creditor. Should neither of these outcomes be reached, then the creditor will be entitled to begin the winding up procedure.
What happens after a winding up petition is served?
Once a winding up petition has been served, all a company’s directors can do is prepare for the court hearing. Assuming an agreement or settlement isn’t reached before the hearing, you must make your case before a judge as to whether your company owes the money and if it should be wound up. It is possible to contest a winding up petition, though if your creditors have a legitimate reason to submit the petition, there is likely to be little you can do in this regard.
The next step will depend on the outcome of the court hearing. If the case is thrown out or ruled in your favour, then your company can continue operating as normal. However, if the court sides with your creditors, there will be one of two results. First, your company may be forced to enter compulsory liquidation to repay your debts to creditors. Second, the judge may order that a repayment agreement be reached. This aims to ensure the company remains open, while still fulfilling its obligations to outstanding creditors.
In some cases, several hearings will be necessary to reach an outcome, which could make for a costly process if you require legal representation. Given that the negative outcomes are quite detrimental, it should come as no surprise that stopping a winding up procedure is an appealing prospect.
How to stop a winding up petition
Thankfully, it is possible to stop a winding up petition. The primary method is during the court hearing. Directors will have an opportunity to make their case, and they can point out any inaccuracies within the petition, or question its legitimacy. This can be done by providing evidence of the owed amount being inaccurate, or demonstrating that the petition should not have been submitted. Proving that the petition was meant for another company, for example, would be one method of doing so.
The courts may throw the case out if you can prove that the winding up petition is either inaccurate or not legitimate. This can buy you some much-needed time to pursue methods of addressing your company’s financial situation.
While contesting a winding up petition in court is a viable method of stopping one in its tracks, prevention is usually better than the cure. If your company is insolvent, and you expect a winding up petition to be around the corner, turning to insolvency procedures could be a good idea.
Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation (CVL) is an insolvency procedure available to directors of insolvent companies. Unlike compulsory liquidation, it is completely voluntary, and affords directors certain valuable benefits as such.
The CVL procedure allows for the straightforward and orderly liquidation of a company. Directors may appoint an insolvency practitioner of their choosing to the role of liquidator, who will carry out the procedure. The liquidator will identify any company assets, dispose of them for the highest possible value, and distribute any proceeds amongst outstanding creditors. Once all distributions have been made, the company will be wound up and removed from the Companies House register. At this point, any debts that remain unpaid will be written off, with the exception of those secured by personal guarantees.
If you would like a more detailed insight into CVLs, read our complete guide to the process.
Let Clarke Bell help you
Handling a financially struggling company is a difficult task, one made more so by the threat of creditor action. It can certainly be stressful if you think your creditors might be considering a winding up petition, but it is vital you act quickly.
Professional advice and a thorough plan can help you achieve a different outcome, one much more favourable to you.
At Clarke Bell, this is precisely our specialty. We have more than 29 years of experience in helping insolvent companies find a path that avoids the winding up procedure. We can do the same for you.
Contact us today for a free, no-obligation consultation to find out what we can do for you.