Has your company or a clients company been threatened with a winding up petition by a creditor?
Time to start worrying!
How the credit reporting landscape has shifted and even a paid and withdrawn winding up petition can kill your company.
One of the most notable changes in recent months is the increase in our inbound enquiries mentioning the following “help we have had a warning of a Winding Up Petition by HMRC or other creditor? Can you help”!?
Yes of course we can, but directors must move quickly to stop what can rapidly become a catastrophic event for their company. It could bring a business to its knees in weeks, or even 2 days. In Scotland it could be within hours of issuing a petition.
What is a winding up petition in UK law?
A winding up petition is a legal notice to the Court which is “issued” to the Court by a creditor. The creditor petitions the Court if the debtor owes them more than £750 and has not paid it, despite promises to do so. As a creditor you must be sure that there is no dispute over the debt, as the winding up petition process should not be used as a debt collection tactic.
Issuing a Winding Up Petition
Any creditor may issue a winding up petition without any warning (without even a statutory demand) if their customer, taxpayer or client owes more than £750. Yes just £750! If the debt is not disputed and the debtor does not pay, then a petition can be threatened. If you reach this stage with any creditor BEWARE the recent and important changes in online credit reporting.
Although the process is not easy and can cost over £3,500 in Court costs and solicitors fees, some creditors issue petitions just to get PAID. And because the cost of the petition is a recoverable cost that must also be paid, a debt for say £2,000 can quickly escalate to £5-6,000 after costs for your business.
As a director of a company struggling with cashflow and juggling payments, don’t let that happen! Talk to your creditor, try and do a payment deal, or better still get advice from insolvency experts. All good insolvency practitioners will give free initial advice on your company’s options.
From a creditor’s point of view, issuing a petition can be seen as the nuclear option – will you get paid? Will you incur more costs – some of which may never be recovered? Will you also lose your customer? Our suggestion for creditors and debtors is that “jaw jaw is often more productive than war war”.
HMRC issues more petitions than pretty much any other creditor. Usually though HMRC staff will have gone through exhaustive rounds of debt management, debt collectors, “time to pay arrangements”, collection/warning letters, and chasing by Field Officers. Then they will usually use outsourced debt collectors before finally sending a 7 day warning letter of the winding up commencement. Usually this is over 2-12 months. When HMRC transfers the case file to its “pre winding up department” then you can be sure that a petition is very likely to be issued. And because patience has worn out, this could be quite soon.
As a company director facing a winding up threat from a creditor what should you do?
Answer number 1, pay the debt, or agree a plan to pay the debt. If this is rejected it is still worthwhile using quality insolvency practitioners (IPs) to guide you. As people who work with creditors and HMRC every day IPs know the processes to use, the discussions to have and the plans to present.
Often our clients have been told a petition will be sent and we sometimes can prevent that happening, with a professionally structured time to pay arrangement, or a company voluntary arrangement. This will need supporting financial forecasts, a statement of the current financial position and a workable and affordable deal.
We still find in 2024 that HMRC and other trade creditors may be content to be paid over time, rather than see the debtor fail and their debt written off.
Of course, if a winding up petition is threatened, and the business is viable then the company can still consider a CVA to restructure the company’s debts. See our winding up petition case studies here and see our articles online or here on LinkedIn.
What does a winding up petition (WUP) do?
The WUP, in effect is a creditor asking the Court to liquidate the company as they believe the company is insolvent. The Court then sends the stamped petition, which will then include a Court HEARING date to the registered address of the company.
Many people think this is still not a major issue. The petitioner may have agreed not to ADVERTISE the winding up petition they STILL have time to fix things.
Well take it from me, that this is potentially catastrophic for most companies.
The Insolvency rules say that a winding up petition cannot be advertised in the London Gazette until 7 days after it was served on the company. It must be advertised more than 7 days before the Court hearing date. Thus, some company directors and creditors think they can use these rules to get a deal done under the “Sword of Damocles” of a filed petition, and so get the debt repaid. Then the petition could be WITHDRAWN. All fine and dandy, if a bit aggressive.
In this digital era, that’s just not the case anymore. Credit reference agencies are somehow getting petition data from the Court Register and informing their customers online, that Company A Limited has been issued with a petition. And they do this within 6-48 hours of the Court filing. Ven reporting on weekends that a Court filing has occurred on a Friday.
This is why the petition process can be catastrophic – it is very quickly in the public domain – everybody knows!
A recent case of ours saw a landlord issued with a petition in March 24 for £240,000 or so of Covid era arrears, thinking this would force the tenant to pay up.
The next day our client received dozens of calls from “advisors” claiming that they could “fix the winder”. This caused havoc. The debt was duly paid (by a group company) and the petition withdrawn after a week, not before many of their creditors knew.
Worse still the bank promptly FROZE THEIR BANK ACCOUNTS the same day as the petition was filed. Our client asked us how the bank could have known, well it seems it, too, was told by a credit reference agency.
The really bad news? Although the debt was paid, by a group company, the information about the petition is still listed on credit reference sites today, two months later. It is marked as withdrawn, but it is still there.
Payments after a winding up petition.
If the company has been served a winding up petition it should not pay any other creditors, rent or even wages perhaps, as such payments are deemed VOID, under section 127(1) Insolvency Act. In simple terms the process of compulsory liquidation commences at the issuance of the petition and so the payments could be deemed reversible (antecedent). Along with a frozen bank account, it can be quite tough to trade after a petition has been issued! Why take that risk?
How can we pay anybody after a petition is served then?
A validation order is often necessary to pay creditors, for legal advice, accountants advice, insolvency advice rent, supplies and even wages. Without this, the company may have to stop trading.
It is possible to pay the debt and have the creditor withdraw the petition, but remember the credit reference agencies’ publicity. It is still out there.
And it is also possible to seek an adjournment of the winding up hearing, to allow more time for the production of a company voluntary arrangement. But the clock is ticking. Speak to us about your options now, if a creditor is threatening to wind your company or your client’s company up. Do not wait until they issue a petition.
HMRC issues about 60% of all petitions. If you have a long standing and failed time to pay deal with PAYE or VAT, get in touch now with KSA Group to get expert and fast help. Be prepared for some tough actions, after some tough talking.
In Scotland, a WUP is EVEN more risky for a company. This is because the petition when issued, is physically posted on the walls of the Scottish Court for all to see. And many petitioners also ask for a provisional liquidator to be immediately appointed at the same time. Even though the winding up petition hearing may be 60 days in the future. So, incredibly and in a matter of a few hours after a creditor issues a winding up petition in Scotland, directors can be removed from their desk, staff sent home and premises closed down. In hours, not weeks. To find out more on winding up petitions in Scotland see here
The key in all company debt situations is to act properly, professionally and to seek advice from expert insolvency practitioners. Don’t just think the threat of a winding up petition will go away on its own.
Call us on 0800 9700539 (days) or 07833 240747 out of hours.
What happens at the Court Hearing of the Petition For a Winding Up Order?
The Judge will hear the petition and if the company cannot pay and there is no evidence or defence that it can pay in the future, then the Judge will issue a WINDING UP ORDER. Once this has happened the Official Receiver, who are licensed insolvency practitioners, will start the process of liquidating the company. If the company has assets the OR may pass the case on to a local insolvency practitioner.
Directors MUST respond to any requests for information and records by the Official Receiver, or a duly appointed liquidator. Failure to do so is a criminal offence.
Once a company has been ordered to be wound up by the court, the Official Receiver, or the appointed liquidator, must investigate the activities of the company directors. They will want to check that they have acted properly and according to their legal and “fiduciary” duties. If the liquidator believes that the directors are guilty of wrongful trading, they may recommend that the directors be disqualified for up to 15 years. More than 850 directors were disqualified in 2023 for failure to adhere to the Bounce Back Loan rules, alone.
It is important to know that once your company receives a petition you have fewer insolvency options available;
- You cannot put the company into creditors’ voluntary liquidation.
- The Court may reverse a sale, so you cannot sell the company or the assets.
- You cannot issue a Notice of Intention (NOI) to appoint an administrator.
- You cannot issue new securities or charges.
- You cannot put the company into pre-pack administration, but an administration order may be made upon the application of the floating charge holder.
Other than paying up there are only a few other options. You can propose a Company Voluntary Arrangement quickly or get legal advice to defend against the petition. For instance, if the debt is not agreed.
Summary
As ever in insolvency, it seems there are changes afoot. This time it is publicly available insolvency DATA that is the issue. If you or your client’s company has a winding up petition issued, it can lead to carnage. Directors can lose control in hours or days. Make sure you have a well seasoned expert guide to help.
