Compulsory winding up is a legal process whereby a creditor owed more than £750.00 may start the court process to liquidate a debtor business.
The compulsory winding up process is expensive for a creditor and relies on their being an undisputed debt over £750.00. The process begins with the creditor issuing a winding up petition.HMRC, are responsible for around 60% of winding up orders.
The process of being compulsorily wound up is generally the worst option for an insolvent business. If you are a company director and your business may be insolvent, it is often better to liquidate your business by voluntary liquidation. For this to happen, you will need to act early and seek advice from a licensed insolvency practitioner. Our Licensed IP’s would be happy to talk to you on a confidential, no obligation basis, so please do get in contact.
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.
Why Would a Creditor Choose to Wind up a Company?
Compulsory Winding Up via the courts can be a costly process for creditors, costing around £1,500.00 to £2,000.00.
Winding up is not meant to be a short cut 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 or have court judgment for the debt.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 in The 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 your business 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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The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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- LEGISLATION “Company Directors Disqualification Act 1986”