When a creditor is owed money by a company and their payment demands have gone unfulfilled for more than 21 days, they are entitled to issue a winding-up petition to the court.
The winding-up notice asks the court to liquidate the company as it is believed that it is insolvent. Once liquidated, the proceeds and funds are used to pay back creditors what they are owed.
Unlike voluntary liquidation, which is initiated by the company director and is a completely voluntary process, those that are issued a winding-up petition will be forced to go into Compulsory Liquidation. This is the most serious form of action that can be taken against a company.
In this guide, Clarke Bell explains what a winding-up petition is. What is involved in the process and what to do if you are issued one.
What is a winding-up petition?
A creditor who is owed £750 or more by a company and has not been paid this after 3 weeks can issue a winding-up petition to the court to recover their debts.
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The petition is made to the court to ask them to wind-up and liquidate the company. This is usually directed at insolvent companies who cannot afford to pay back their debts or cover daily costs.
However, due to the current COVID-19 pandemic, the rules on winding-up petitions have been temporarily changed.
The UK government has recently stated that no winding-up petition can be issued to a company that has been forced to close due to COVID-19 until 31st March 2021. However, if the debt was not a result of the global pandemic, you can still be faced with a winding-up petition.
How does a winding-up petition work?
Once a winding-up petition has been issued, it will then be served to the company and advertised 7 working days later in The Gazette. It is then heard at court where it will either be approved or dismissed.
If the winding-up petition is approved by the court, a winding-up order is then made and served to the company.
How does a winding-up petition impact directors?
As a result of a successful winding-up petition, a licensed Insolvency Practitioner (IP) must be appointed to investigate the company and its directors to ensure that the situation wasn’t due to fraudulent trading or wrongdoing.
To do this, the Insolvency Practitioner will look over the company’s transactions from the last 2 – 5 years. If any evidence of wrongdoing does become apparent, this will be reported to the Insolvency Service and could lead to fines or a director’s disqualification.
Likewise, if the Insolvency Practitioner discovers wrongdoing on the director’s behalf, the director can become personally liable for any debt.
What are my options if I receive a winding-up petition?
If you receive a winding-up petition, fewer options become available to you than if you voluntarily started the liquidation process. With this option you will not be able to sell the company or its assets. Once the petition has been issued, you can still put the company into a Creditors’ Voluntary Liquidation, if the creditor agrees to withdraw their petition.
You will still be able to issue a Notice of Intention to appoint an Administrator (but only if you serve notice to the creditors, to which they are likely to object).
However, if you act quickly, you may still be able to propose a Company Voluntary Arrangement. This forms a legally binding agreement between the director and the company creditors to allow a proportion of its debts to be paid back over time. This requires the approval of 75% of the creditors.
If this is agreed, the company can continue trading as usual and the director will remain in control. A Company Voluntary Agreement can last between 3-5 years and must be overseen by an Insolvency Practitioner.
Another option is to obtain an Administration Order and put your company into administration. When a company goes into administration, they are automatically given protection against legal action. An Insolvency Practitioner is again appointed as the administrator and whilst they are overseeing the case, no other party is able to apply to wind up the company.
It’s better to act quickly
When a company is experiencing financial difficulties, it’s always better to act quickly. From the first signs of financial distress, a director should appoint an Insolvency Practitioner who can help them find the best route forward, usually looking towards options for business rescue where possible.
An insolvent company that does act quickly will have more avenues available to them, including a Creditors’ Voluntary Liquidation (CVL)
Unlike in cases of Compulsory Liquidation, a Creditors’ Voluntary Liquidation is a voluntary process that is initiated by the company director. A CVL can occur when a company is insolvent and is the process of liquidating and winding-up a business.
A licensed Insolvency Practitioner must be appointed to carry out a CVL, however, unlike with Compulsory Liquidation, the director is free to choose which IP they work with. For more help on how to find the best Insolvency Practitioner, check out our guide.
The advantages of a CVL are that it is a voluntary process and won’t impact your personal finances. Should you wish to open another company in the future, you will be able to operate as a director again.
Is your business experiencing financial difficulties? Get in touch with Clarke Bell today
If your business is facing financial difficulties, it’s better to act quickly. This could help you avoid being served with a winding-up petition and entering into Compulsory Liquidation. The sooner you act, the more options will be available to you, such as Creditors’ Voluntary Liquidation.
If you are considering a CVL, let Clarke Bell help with the next steps. Our team of experts have years of experience working with insolvent companies to get the best solution for them. Our team of friendly professionals will offer expert insolvency advice to get you on the right track.