The decision to wind up a business that owes you money should not be taken lightly. It is a last resort when all other measures have failed and what is more, there are no guarantees the creditor will even have the debt paid.
Although the process should work efficiently, it still takes time and money. For those who are not sure what to do or have limited time, then they may also need to take legal advice so that the requirements are followed to the letter, and the case is not dismissed because of procedural errors.
Why Should I Wind Up a Company?
Winding up a business is about having it shut down and the directors prevented from running it – there may be some debt recovery, but this is not the overriding reasons for the process. If directors are found to have run the business fraudulently or been involved in other wrongdoing, they may be disqualified from running other firms.
Winding up also means assets will be sold and any legal disputes settled, with funds collected and distributed to creditors. There can be no certainty in terms of debt recovery. The chances are that directors will have sought to raise cash to clear debts or at least pay their suppliers and quite often, unsecured creditors in particular will receive nothing.
Who can Wind Up a Company?
Any creditor can do this if the business owes them £750 or more and it can be shown that the company cannot pay them. But, winding up is generally a move taken by creditors that are owed much larger sums. Most active in this area is HMRC, which is said to make up around 60% of winding up cases.
Winding up may mean recovering the debt, but it also could leave the creditor even more out of pocket. Instead, it makes far more sense for the creditor to attempt other routes, such as enlisting a specialist firm of debt collection solicitors or taking out a county court judgement against the company.
What is the Process to Wind up a Company?
The winding up process takes around four to eight weeks and then liquidation can take a further year. Depending on their understanding and experience, creditors may find it a considerable administrative burden and they should seek guidance, typically from an insolvency practitioner like ourselves, or a solicitor, if they are uncertain about the timelines and process.
First stages of Winding Up a Company
The first task is to complete Form Comp 1 needs to be completed, providing details of the company that owes money, and three copies made. This form instigates a winding up petition which is the formal request for a court to wind up the company.
If the company has already been dissolved, a request should be made for the court to restore the business.
The creditor should provide evidence that the firm owes money and this should be via details of their earlier Statutory Demand – this is a formal request for payment within 21 days and it should show the date it was sent and the sum due. If the creditor has also taken out a county court judgement, then details of this should be sent showing the court name and case number, with the amount awarded plus the creditor’s costs and interest. The creditor also needs to complete Form Comp 2, which confirms details of the petition.
What is the Petition in a Winding Up Action?
The petition is a legal notice that the creditors files with the court and which requests a hearing to establish whether the debtor company owes money.
The petition must be verified by a statement of truth. While there is not a specific form to use for this purpose, it contains certain information prescribed by law. The statement of truth has to be made and signed no more than 10 days before the petition is issued.
The petition will have a hearing date on it and must be served at the registered office of the company. This will then be advertised in The Gazette to say the petition has been served and to ensure other creditors are aware of the action and announces the date of the hearing. The advert must state, the name and address of who has presented the petition to wind up the company, the date the petition was presented, the court where the hearing will take place, that anyone wanting to attend the hearing must give notice and that if the petition is successful, then a winding up order will be issued by the court. It should also show a name and address of an appointed insolvency practitioner. This advertisement must appear at least seven days before the hearing.
It is the publication of The Gazette advertisement that triggers certain actions for the company which can be difficult for them to deal with – typically, the company bank account will be frozen and as such they may find it impossible to pay suppliers who will no longer deal with them. Meanwhile, Section 127 of the Insolvency Act means that the company’s assets cannot be disposed of unless allowed by the court
Next, the creditor needs to complete another form – Comp 3 (certificate of compliance) – and send this with a copy of The Gazette advertisement to the court at least five working days before the hearing. Following this, form Comp 4 should be completed and this lists all those who will be attending the court by 4.30pm on the day before the hearing.
Where is the Petition Sent?
This depends on how much paid-up share capital the company has and this information can be found on the Companies House register. If the business has paid-up share capital of £120,000 or more, then the petition should be submitted online and will go to the High Court. The court fees are paid online, but the petition deposit is paid later. An email will be sent to the creditor, telling them how to pay the deposit.
If the paid-up share capital is under £120,000, then the nearest court needs to be found to the company’s office and this must be a court that deals with bankruptcy cases. The petition can be submitted online at one of the following courts:
- Admiralty and Commercial Court
- Chancery Division
- The Insolvency and Companies List (formerly known as Companies Court)
- High Court (including Bankruptcy Court)
- London Mercantile Court
- Rolls Building
With these courts, the court fees can be paid online and again an email will be sent to the creditor telling them how to pay the deposit.
If it is another court that is nearest to the company’s office and it deals in bankruptcy, then the petition will need to be sent by post and the fees can be paid in a number of ways, such as by bank transfer or a solicitor’s cheque, made out to HM Courts and Tribunals Service.
The petition must be ‘served’, which simply means delivered, to the company and a process server can provide this service – a solicitor can advise on this. Once this has been done, then the court needs to be provide with a ‘certificate of service’. If the petition could not be served by handing it to an individual, then it can be attached to the company’s registered office front door.
What Happens Once the Winding up Order is Made?
Once the court has made the winding up order, the business enters liquidation.
A liquidator will be appointed, who is often the Official Receiver. Creditors will be given an opportunity to approve the appointment or if not to appoint another liquidator. The process of liquidation is about realising assets and the proceeds distributed among the creditors according to their priority. The liquidator will also investigate the conduct of the directors and provide a report to the Disqualification Unit at the Insolvency Service. During a compulsory liquidation, the directors lose their powers to control the company’s affairs, although they remain in office and must answer questions and provide information as requested by the liquidator.
What are Alternatives to Compulsory Winding Up?
If the creditor is in communication with the company, it may be better for all concerned if a Company Voluntary Arrangement (CVA) is agreed. This is where the company agrees to pay creditors monthly amounts. This may be set at a lower amount that the actual sum owed or may not include interest payments. However, the company takes on responsibility for the process and it may offer the creditor a more likely opportunity to recoup at least some of the debt.
What if Someone Else has Already Issued a Winding up Petition?
If it is discovered that another creditor has already petitioned for the company to be wound up, then it is necessary to register as a creditor. This is done by completing a government form known as Proof of Debt and supplying it to the named Insolvency Practitioner. There is no guarantee of payment but the creditor does gain voting rights and receives updates.
What are the Temporary Restrictions on Winding Up Petitions Because of Covid-19?
Legislation was passed by the government because of economic uncertainty resulting from the Covid-19 pandemic, as it was believed there could be a raft of insolvent businesses and these should be given more breathing space to recover, in addition to courts being unable to cope
The temporary restrictions are allowed under the Corporate Insolvency and Governance Act 2020 and they were announced to 1 March 2020 and are to end on 30 September 2021. However, it is possible the government may extend the date.
The restrictions mean that a creditor may not present a winding up petition during the specified period unless it has reasonable grounds to believe that coronavirus has not had a financial effect on the company. It is expected that an announcement will be made on when normal practice for winding up will resume, but much will depend on the success of the vaccination programme and the economy showing greater resilience than exists at present.