Compulsory winding up takes place when a creditor uses a court process to shut down an insolvent limited company and have it removed from the Companies House register.
The creditor may be another business to whom money is owed, a bank or other lender, or in many cases, HMRC, which is responsible for around 60% of winding up orders.
The process of winding up can have serious implications and if this is a concern for you, then don’t delay seeking advice from a licensed insolvency practitioner – the earlier you act, the more options you will have. Going through a compulsory liquidation is highly damaging, both in terms of your reputation but also in terms of having to go through investigations and at worst facing prosecution or personal liability for debts.
When can a Company be Compulsorily Wound up?
Because of the Covid-19 pandemic, a temporary stop was put on winding up in the courts. Businesses in financial distress had been sheltered from creditor action through legislation passed in June 2020 with the Corporate Insolvency and Governance Act 2020 – LEGISLATION “The Corporate Insolvency and Governance Act 2020” . However, from 1 October 2021, GOV.UK “End of temporary insolvency measures” the government announced it would allow actions to start once again. Yet, while have been restrictions lifted, there are some important changes, as follows:
- Businesses are protected from creditors insisting on repayment of relatively small debts with the current debt threshold for a winding up petition temporarily raised to £10,000 or more.
- Creditors are now required to seek proposals for payment from a debtor business, giving them 21 days for a response before they can proceed with winding up action.
These measures will be in force until 31 March 2022, although the existing restrictions will remain on commercial landlords from presenting winding up petitions against limited companies to repay commercial rent arrears built up during the pandemic. Commercial tenants will continue to be protected from eviction until 31 March 2022.
Why Would a Creditor Choose to Wind up a Company?
Winding up via the courts can be a costly process, costing around £1,500 to £2,000. But, if a creditor has chased hard and not achieved a satisfactory outcome then they may see winding up your company as their only solution – the key issue now is that they need to be owed at least £10,000.
However, it should be remembered that winding up via the courts is not meant to be a debt recovery process. Creditors may still receive little or nothing if there are insufficient assets and the director is unable to pay even if found personally liable. Instead, the purpose is to prevent a business from trading and stop further losses.
Before they can wind a business up, the creditor needs to issue your company with a statutory demand – the purpose of this is to demand that the debt be paid –
If the statutory demand has been ignored for 21 days, then the creditor can use the courts to close the company. If the creditor has already had an upheld County Court Judgement against the company, then they do not need to issue a statutory demand as this acts as proof of the debt.
What is the Process to Wind up a Company?
The creditor will issue a petition in court, which has a hearing date on it – a petition is simply another term for an application. This has to be served at the registered office of your company by a process server.
The creditor must allow seven days after the serving of the petition at the registered office, before it can be advertised in the Gazette and the advertisement must be seven days before the petition hearing date.
The key point is that there are seven days after being served details of the petition to prevent liquidation of your business. Once advertised inThe Gazette, details of your company will be picked up on by other creditors. Shortly afterwards, the company’s bank accounts will be frozen, which then means it is impossible to trade.
In rare circumstances where the bank account has been frozen, you may be able to secure a validation order that will allow the business to continue trading, in specific circumstances. This has to be applied for through the court and would be to allow, for example, wages to be paid or to make payments to creditors. You will need a witness statement of a director or other officer who is familiar with the company’s financial affairs. The court will request management accounting records before making a decision.
You should not attempt to trade without a validation order – this could store up problems for the future, including possible prosecution for wrongful trading and being pursued on a personal liability basis.
The petition will then be heard in court and will either be dismissed or approved. If approved, the Official Receiver will be appointed, who will investigate directors’ conduct to find reasons for the business failure. They will act as the main point of contact for creditors, while employees will be made redundant. Directors will no longer have any control over the business.
Meanwhile, if you have more creditors, then these may also support the petition and even if the original creditor is paid off, then others may take their place. By the time the petition has been advertised, pressure mounts and the situation becomes increasingly difficult.
Your company’s assets will also be professionally valued with a view to selling them at a liquidation auction, and the proceeds distributed to creditors according to their priority.
Can I Stop my Business Being Wound up?
If you enlist the help of a licenced insolvency practitioner within the first few days of being served with details of the winding up process and before the petition is advertised you have a far better chance of success. You have a number of options, including:
- Paying off the debt in full
This may be possible if you are able to gain asset or invoice financing perhaps, but even if you do, you must ensure the petition is withdrawn from the court record to ensure it is the end of the matter. The goal should be having the petition dismissed before it is advertised. You will also need to pay costs and attend the hearing to provide evidence that the debt is settled. If there was a crossover period when you paid the debts off but the proceedings had already started then you can apply to cancel a winding up order, providing you do this within five days of receiving the order –
- Show that the winding up is unjustified
The chances are the creditor will either be highly experienced in taking winding up action, such as with HMRC, or even if they are not, they will have taken advice from a solicitor. If, however, you have proof that the amount being claimed is incorrect or you can show that the correct procedure has not been followed, then you may be able to challenge this and stop the petition – but you should realise this is going to be unlikely.
- Obtaining an adjournment
This may be possible if you can prove to the court you have a way forward that will ensure a better result for creditors. One possible solution could be a Company Voluntary Arrangement which means coming to a legal agreement with creditors to repay them – often at a reduced amount – over a set period of no more than five years. Or, administration could be put forward as an option if there is a buyer lined up. You will need to take expert advice before making any representations and again, act fact before the winding up process has progressed too far. If the court agrees to these measures this will stop any legal action being taken against your business.
It may be possible to reverse a winding up order if an application to “stay” liquidation proceedings can be made by the Official Receiver or another appointed liquidator, such as in the case where all debts have been paid off. But, if this occurs late in the process, your business may technically remain in liquidation and this will still be on file at Companies House.
What Action Could I Face From Being Wound up?
Any personal guarantees are likely to be called in by lenders. Further, depending on the outcome of the Official Receiver’s investigation you may be disqualified from acting as a director, potentially for up to 15 years under Company Director Disqualification Act, 1986 – LEGISLATION “Company Directors Disqualification Act 1986” .
You may have personal liability for debts if you have wrongfully traded while or if you are found to have favoured one creditor over another, while the business was insolvent. There will also be close inspection of the directors’ loan account to see if money has been taken out of the business and if this is the case, it will need to be repaid or again, personal liability could arise. Fraudulent trading is the most severe offence and for this large fines or even jail could be imposed.
How can I Avoid my Company Being Wound up?
If you believe a creditor is about to take winding up action do not delay or attempt to manage the problem yourself. A licenced insolvency practitioner will have the experience and expertise to deal with this extremely serious situation. They may be able to negotiate with creditors on your behalf and this includes with HMRC. They will have contacts with specialist solicitors if you need representation and they will seek to minimise the damage that can result from winding up.
There are times when a business has no option other than to close. However, you should also be aware that there will be a better outcome for directors if you enter Creditors’ Voluntary Liquidation even though this will not be possible once winding up proceedings are underway.
Overall, the message has to be when it comes to compulsory winding up, speed is of the essence so seek help at the earliest opportunity.
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