For creditors of a company, open lines of communication with their customers and the prompt repayment of their bills are the ideal scenario. However, this ideal is not always attainable, with some customers falling short on their repayments. This can be for several reasons, ranging from a simple oversight to the customer struggling to deal with its financial affairs. While some of these reasons can be resolved relatively easily, others pose more of a challenge.
So, if you are a creditor of a company and you are struggling to recover your debt, what can be done?
A winding up petition could be the solution for creditors dealing with a company that can’t, or won’t, pay. Although an intensive procedure, it allows creditors to rely on the authority of the courts to enforce debt recovery, by means of compulsory liquidation. It can be an effective tool for this reason, though it is not one to be taken lightly.
In this article, Clarke Bell will discuss how to create and issue a winding up petition after a statutory demand, what the procedure looks like, and how it can affect you.
What is a winding up petition?
A winding up petition is a document that can be submitted to the courts in order to force a company into compulsory liquidation. It is typically done by a company’s creditors as a last resort, when other methods of debt recovery have not worked. Rather than continue a back and forth with a debtor who cannot pay, and risk ceding the initiative to them, creditors can use the winding up procedure to ensure their debt is paid. Assuming the courts approve the petition, the company in question will be liquidated by an Official Receiver, or a court-appointed liquidator, and any proceeds of the liquidation will be distributed amongst the petitioners, according to the debt owed.
While a winding up petition can be an effective method for creditors to recover their debts, it is not a viable first course of action. The reasons for this are twofold; it is both time and resource-consuming for the petitioners, and it requires a statutory demand to have been submitted first. Assuming the statutory demand has gone unpaid, a winding up petition may be an option for you.
Who can initiate a winding up petition?
In most cases, creditors will initiate the winding up procedure. As we have mentioned, this is to recover debts owed by the company, yet are not likely to be repaid without external influence. However, creditors are not the only ones who can submit a winding up petition.
While comparatively uncommon, some shareholders are eligible to initiate the winding up procedure. This is typically a possibility during disputes between directors. For example, should one director wish to take the company in one direction, and the other be firmly against it, then a winding up petition could be submitted to break the deadlock. Unlike winding up petitions submitted by creditors, the courts generally prefer to reach an outcome that doesn’t involve the company closing. This could be in the form of one director selling their shares in the company, or mediating the dispute, for example. However, sometimes an alternative cannot be reached, and the winding up petition will be approved.
How to create and issue a winding up petition after a statutory demand
Before a winding up petition is an option, creditors must first serve their debtors with a Statutory Demand. This essentially gives your debtor 21 days to repay the debt in full, or reach an agreement with you. Should the debt go unpaid and an agreement not be reached by the end of this time frame, then you may submit a winding up petition.
Submitting a winding up petition is relatively easy, assuming you have the requisite information at hand. You will need a Form 4.2, which can be downloaded from the UK government’s website. It is a two-page document with several fields to complete, which includes the following key information:
- Company details – You must include the company’s full name, the registered address of its headquarters, and its registration number. (If you do not already know these details, you can find them by searching the company’s records on the Companies House website.)
- Proof of an unpaid Statutory Demand – You must include evidence that you issued a Statutory Demand that went unpaid during the allotted time frame. You can also include evidence of a court judgment against your debtor, if appropriate.
- Reasoning behind the winding up petition – Lastly, you must include your reasoning behind choosing your course of action. This is largely a formality, provided you have followed the necessary steps before submitting a winding up petition.
Once you have completed Form 4.2, you must serve a copy to the relevant court, and to the debtor directly. If the outstanding debt is in excess of £120,000, you must submit your winding up petition to the High Court. If not, then the nearest court to the debtor’s registered head office is appropriate. After the serving of these documents, you must also provide the court with a Certificate of Service, which acts as evidence of having served the petition. After this bout of document servings, your next step is to wait to be notified of the court hearing. Once you have a date, you must complete additional paperwork, including posting a notice in the Gazette, providing the court with a list of those attending the hearing, and providing the court with a certificate of compliance and a copy of the Gazette notice.
Also Read: How Can a Winding Up Petition Be Set Aside?
Can a winding up petition be stopped?
Although a winding up petition can be an effective tool for debt recovery, it isn’t flawless. Recipients of a winding up petition are entitled to challenge the document. So, you need to make a strong case in order to get your petition to go smoothly. Inaccuracies in the petition can lead to the case stalling, or even being dismissed outright by the courts. As such, you should have an ironclad case long before it reaches the courts.
While a legal challenge can scupper a winding up petition, the main method of stopping the process is to ensure it can’t begin in the first place. If directors of an insolvent company place their company into a Creditors’ Voluntary Liquidation before the petition can be served, then the option is simply off the table.
Closing an insolvent company using a Creditors’ Voluntary Liquidation
Directors of insolvent companies have the option to enter their companies into Creditors’ Voluntary Liquidation (CVL). This is a voluntary liquidation procedure, allowing directors to close their company while also fulfilling their obligations to creditors.
However, while a CVL aims to repay all of a company’s creditors, this is not always the case. Insolvent companies often don’t have enough money in the form of assets and accounts to repay all their obligations. This usually results in some debts being written off at the end of the procedure. Furthermore, a CVL prevents creditors from taking legal action against a company that enters into the procedure, meaning other forms of debt recovery are no longer options. As such, if you think your debtor can’t repay your debt through liquidation, and may soon initiate a CVL procedure, it is important to act swiftly to retain the initiative.
Clarke Bell can help you
If you are considering a winding up petition as a means to recover a debt, but are unsure whether it is an option, it is vital you seek legal counsel before taking action. Legal professionals can help you identify the options you have available, and ensure you settle on the best one for you.
Alternatively, if you are the director of an insolvent company and you are facing increasing creditor pressure, it is essential that you act now.
If a winding up petition is served on your company, it is likely to be difficult to avoid compulsory liquidation.
Clarke Bell can help you find the best solution to your insolvent company’s financial problems, whether it be closing through a CVL or otherwise.
We have more than 29 years of experience in helping insolvent companies find the best path forward, and we can do the same for you.
For a free, no-obligation consultation with one of our experts, contact us today.