Winding Up Petition

Compulsory Liquidation

When a company ends up in compulsory liquidation it is usually a sign that a creditor has abandoned the task to recover money from that company, or it can indicate that a Crown Court or Government agency has closed the company using a winding up petition for the good of public interest.

So how does a company go into compulsory liquidation and what would happen in the winding up process?

Obviously this is a very serious action for creditors to take as it’s quite costly and if the company is subjected to this process it can seriously hinder the ability to conduct business. If your company has a company or creditor threatening to close down your company you should immediately take action and seek professional advice.

It is possible to stop compulsory liquidation but quick action is needed if you or your company has been served a “winding up petition”.

Creditors Petitions:

A creditor has had to pursue the debts due to them for a significant period and has tried all other avenues to recover. Often deals to repay will have been agreed but the company in debt has not stuck to the deal or simply does not communicate with the creditor. They instruct a solicitor or debt collector to collect the debt and all avenues fail. The company then has to explore the cost of starting action to start shutting down the company.

The costs of this action can be quite high and a creditor then has to decide whether the debtor is likely to pay up or not. The debt must be over £750 be undisputed and the creditor must have already notified the debtor of its intent to collect the debt. Often this involves issuing a statutory demand beforehand, if the debtor fails to pay the demand in 21 days and the company does not dispute the debt a creditor may issue a winding up petition. From solicitor to solicitor the costs vary but an average cost of the action will be £250-500 for a stat demand, £1,000-2,000 for a winding up petition (which includes court costs). Regardless of this for larger debts it is a very effective way of collecting money when the creditor believes that the company had the means to pay it. A lot of larger companies use established debt collection law firms to collect their debts by these means.

The application for a petition will be granted where it can be proven to the court’s satisfaction that the debt is undisputed, attempts to recover have been undertaken and the debtor is not compliant. A petition will be issued and court hearing date granted, usually the date is well in the future because of court pressures. Once the petition is served to the company it has a period to pay the debt or to defend the action, this can be costly as the action is always in High Court. This means a barrister has to attend and the costs of defence in these situations can be high. If the case is found the company is closed by the court.

IMPORTANT WARNING! Even if the debt is paid the fact that a petition is issued means that a closure hearing MUST still be held. Between the date of the payment and hearing it is possible that another creditor can find out about the petition and “substitutes” their debt for the paid debt. This means they can speed up the action in order to get to the front of the queue get paid before others.

Advertisement of the Petition

Fifteen days or so before the hearing the petition can be advertised in the London Gazette in order to inform people of the scheduled hearing. All high street banks and lenders monitor this carefully because one of their customers is involved in this sort of hearing they usually have to freeze their bank accounts immediately in order to stop further trading. This is to stop any assets being sold or to stop any other transactions that may worsen the creditor’s position. This is to stop dissipation of assets under s127 Insolvency Act 1986. This mechanism is used most by HM Revenue & Customs. Over 60% of all petitions are issued by the crown agencies. Why is that?

Well the Revenue and the VAT are involuntary creditors so because you are trading and employing people the debts can continue to mount up. If you have tried to enter into deals to repay outstanding PAYE and or VAT and still continue to mot make payments the crown debt continues rising so they decide to close your company up. This way either the company will pay, enter a CVA or Administration, or simply just stop trading.

If the Crown closes your company down just remember this, the liquidator is appointed by the court and will investigate the officers of the company very carefully. If it is proven that you traded wrongfully, took credit with no intention or means of repaying the debts, failed to submit your accounts or a number of other offences then it is a possibility you and your company will face action.

It is possible to prevent the advertisement of the petition in the London Gazette?

Under the Company Directors Disqualification Act 1986 you could be banned as a director for up to 15 years. You could also face criminal proceedings under the Social Security and Administration Act 1992 and the Criminal Justice Act 1988. In English this means if PAYE has been used wrongly to the betterment of the company or its directors have incurred any gains these can be pursued from the personal estate of the director concerned.

Under the Income Tax (Employment) Regulations 1993 the revenue is entitled to recover unpaid PAYE from directors when it is proven that the directors were fully aware of the wilful failure to operate the PAYE scheme correctly.

Government Petitions:

If the crown (either tax agencies or the DBIS) believes that a company is contravening legislation such as the Trading Standards legislation or is acting against the public or government interest, it is possible for the company to be liquidated compulsorily. This is a very serious action to take and is not used very regularly. In such cases criminal and or disqualification proceedings are quite common.

Company Directors Disqualification: remember the DBIS/liquidator can press for action.

Summary

Whatever the scenario it’s vital that you take all reasonable steps to protect the assets of the business to conform to the liquidator’s wishes and to act responsibly.

Remember that the last option available after this is to allow the company to be compulsorily liquidation essentially to be avoided at all costs.