A winding up petition is a petition that a creditor files with the courts with the intention of forcing a debtor company into compulsory liquidation. A creditor owed more than £750 can serve a statutory demand. If, within three weeks, the company does not pay the debt, or secure or settle it to the creditor’s reasonable satisfaction, the company is treated as unable to pay its debts. A creditor can also petition by proving in other ways that the company cannot pay, for example where enforcement of a court judgment has failed to recover the debt in full, so a smaller debt can still lead to a petition.
The simplest way to avoid a winding up petition is to ensure that your company pays all its debts to all its creditors on time and in full. Unfortunately, if the company is going through a difficult period, or is insolvent, that is not always possible. In this case, the best thing you can do is to communicate with unpaid creditors and try to reach an agreement as to how the company can repay the outstanding debts.
If your company is insolvent, you may want to consider taking action and implementing a company rescue process such as a company voluntary arrangement or entering the company into administration. Alternatively, if it’s clear that the company will have to be liquidated, entering the company into a creditors’ voluntary liquidation lets the directors decide when to act and does not need a court petition or hearing, so it is a less public process than compulsory liquidation.
If the company is unable to pay its debts due, it is likely to be insolvent. When a company is insolvent or close to insolvency, the directors must consider, and give appropriate weight to, the interests of its creditors, and those interests become the main consideration once insolvency is unavoidable, so you should be very careful about the actions that you are taking to avoid being in breach of your director’s duties.
Negotiation
As an initial step, you should try and come to an agreement with each of the company’s creditors about how you can repay outstanding amounts. If you owe money to HMRC, you can negotiate a Time to Pay Arrangement where you repay the outstanding taxes over an agreed period of time. You can try to negotiate similar agreements with the company’s other creditors.
Company Voluntary Arrangement
A company voluntary arrangement is a formal process to achieve agreement between a company and its unpaid creditors. It is used to allow the insolvent company to repay its debts over a period set in the proposal and approved by the creditors, often up to five years. A CVA is approved when at least 75% by value of the creditors who vote are in favour. It is not approved if creditors holding more than half of the total value of the unconnected creditors, counting all those whose claims are admitted for voting whether or not they voted, vote against it. You’ll need to demonstrate that the company can be turned around in order to achieve agreement from the creditors.
Administration
Going into administration is a process aimed at rescuing insolvent companies. An administrator, who is a licensed insolvency practitioner, manages the company during the administration. The administrator must aim first to rescue the company as a going concern. If that is not reasonably practicable, or a better result for creditors as a whole would follow, the aim is a better result for creditors as a whole than a winding up would give. Only if neither is reasonably practicable may the administrator realise property to pay secured or preferential creditors, and then without unnecessarily harming the creditors as a whole. A moratorium is placed on companies in administration. Creditors cannot start or continue legal action against the company without the administrator’s consent or the court’s permission, and no winding up order can be made except on a public-interest or financial regulator’s petition. That makes it a powerful tool to avoid a winding up petition. The directors generally cannot appoint an administrator out of court once a winding up petition has been presented and not yet disposed of. The exception is a petition presented after the notice of intention to appoint was filed at court, and even then not a public-interest or regulator petition. Otherwise the company or the directors must apply to the court for an administration order, or a qualifying floating charge holder can appoint. An administration order dismisses a petition already presented.
Creditors’ Voluntary Liquidation
A creditors’ voluntary liquidation is a statutory process used to liquidate an insolvent company. Instead of the company being forced into liquidation by a winding up petition, the shareholders pass a resolution to wind up the company. The company can nominate a liquidator, but the directors must invite the creditors to nominate one, and the creditors’ choice becomes liquidator unless the court orders otherwise. It’s preferable to compulsory liquidation because the directors decide when to act and there is no court petition, so it is less public. Once the liquidator is appointed, the directors’ powers cease unless the creditors agree otherwise.
Need Advice?
If you’ve received a winding up petition or are being threatened with one, you should seek advice as soon as possible. At AABRS® , we have significant experience with dealing with insolvent companies and can advise you about the possible steps that you can take. Call 0208 444 3400 for an initial telephone discussion.