How to Prevent Creditors from Forcing Your Company into Liquidation

For company directors, the threat of compulsory winding up by a creditor can be extremely stressful. In fact, there’s no more serious challenge a limited company can face. So, what are the alternatives to liquidation? Is there a way to avoid shutting the company down?

You can take actions, such as negotiating with creditors or insolvency processes like a company voluntary arrangement (CVA), but they need to be attempted promptly before a winding-up petition can be filed.

My advice is to quickly clarify your options using the information below and follow that up with immediate, practical steps that include professional assistance from insolvency practitioners such as ourselves.

Negotiating with Creditors

Negotiating directly with your creditor is perhaps the most obvious step in preventing your company from being pushed into liquidation.

Of course, if they’ve already issued a winding-up petition, this ship may have sailed, but it’s nevertheless worth considering.

Reach out to them with a viable plan for repayment over time, and don’t forget to document any agreements in writing to formalise the negotiation outcomes.

Creditor negotiations can be one of the best options in preventing a winding up petition but it’s important to recognise that they’re not legally binding so the situation could reoccur in the future should the creditors change their mind. On this basis, a CVA may be more useful in some situations.

HMRC Time to Pay Arrangement

HM Revenue & Customs (HMRC) offers a “Time to Pay” arrangement for companies facing difficulties in meeting their tax obligations.

This option entitles businesses to spread their tax payments over a period, making it easier to manage cash flow while fulfilling tax liabilities. Entering into a Time to Pay arrangement involves contacting HMRC to discuss your company’s financial situation and proposing a payment plan that aligns with your current capacity to pay.

Our advice is to engage with HMRC early and openly, as this can increase the likelihood of an agreement being reached. As the UK’s most common petitioner for compulsory winding up, HMRC is always someone to keep in contact with and avoid the potential for escalation.

Pay Off the Debt Using Alternative Finance

Alternative finance refers to funding sources outside of traditional bank loans, including options like invoice financing, asset finance, peer-to-peer lending, or crowdfunding. These alternatives can provide your company with quick cash flow to settle your debts, potentially stopping the liquidation process.

Of course, you’ll need to choose the right type of alternative finance for the company’s specific situation. For instance, invoice financing allows you to borrow against the value of your outstanding invoices, while asset finance can help you purchase essential equipment by spreading the cost over time, preserving your cash flow for debt repayment.

Enter into a Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) offers a formal route for companies to settle their debts over a fixed period while continuing to trade. Under a CVA, your company can reach an agreement with its creditors to pay back a portion of its debts, based on what it can afford, over an agreed timeframe. This arrangement must be approved by 75% (by debt value) of the creditors who vote on it.

Entering a CVA requires careful preparation and the guidance of an insolvency practitioner, who will help formulate the proposal, and manage the negotiation process with creditors. The proposal outlines how the company plans to operate and make payments during the CVA period, offering creditors a clearer return than they might receive if the company were liquidated.

Enter Company Administration

Entering company administration is aimed at rescuing an insolvent company, bringing protection from creditors, while a plan is developed to save the business or maximise returns to creditors. An administrator, usually a qualified insolvency practitioner, is appointed to run the company with the goal of achieving the best outcome for creditors as a whole.

This process involves a thorough assessment of the company’s situation to explore all possible options, which might include restructuring, selling the business as a going concern, or agreeing on a CVA.

Dispute the Debt

If you believe that the debt claimed by the creditor is incorrect, disputing the debt is a viable course of action. This involves challenging the validity on legal grounds or due to errors in the creditor’s calculations. Successfully disputing a debt can prevent liquidation by either eliminating the obligation to pay if the claim is found to be invalid or reducing the amount owed to a manageable level.

To dispute a debt effectively, you should:

  • Gather all relevant documentation related to the debt, including contracts, invoices, and any correspondence.
  • Analyse the creditor’s claim to identify any inaccuracies or grounds for dispute.
  • Seek legal advice to understand your rights and the best approach to dispute the claim.
  • Communicate your dispute to the creditor in writing, providing evidence to support your position.

Get a Standalone Moratorium

A moratorium is a temporary period that provides your company with protection from creditor actions while you explore rescue options. If you obtain one, litigation procedures will be stayed, landlords cannot forfeit your lease, and secured creditors cannot call in security.

While it runs, you won’t be able to take out funding (above £500) or dispose of company assets

To obtain one, you’ll need to appoint a licensed insolvency practitioner (IP) to act as the monitor. The monitor’s role is to assess whether the moratorium is likely to result in the rescue of the company as a going concern.

During the moratorium, the monitor oversees the process while you provide regular updates on the company’s financial position. This period allows you to develop a plan to rescue the business and avoid forced liquidation by creditors.

Want to Stop a Winding up Order? Get Immediate Support from Company Debt

Facing the threat of liquidation requires immediate and informed action. At Company Debt, we understand the stress and complexity this situation brings. Our team of experienced insolvency practitioners is here to offer the support and guidance you need.

We are committed to helping you navigate through this challenging period with clear, practical advice and strategic solutions tailored to your unique circumstances.

FAQs on Stopping Compulsory Liquidation by Creditors

Begin by reviewing your company’s financial status to confirm the debt validity. Promptly engage in open communication with the creditor to express your intent to resolve the situation. Consider seeking immediate advice from an insolvency practitioner for strategic steps.

If negotiations do not yield a positive outcome, explore formal debt resolution options such as a Company Voluntary Arrangement (CVA) or an administration process. These methods legally protect your company from liquidation while you work on a repayment plan.

Immediate action is essential. The time from a winding-up petition to a winding-up order can be short. Early intervention gives you more options to resolve the debt and potentially halt the liquidation process.

Key indicators include receiving formal demand letters, threats of legal action, or a sudden halt in communication from the creditor. Regular monitoring of communications and maintaining open lines can give early warnings that need proactive measures.

An insolvency practitioner can offer expert advice on debt management, negotiate with creditors on your behalf, and help implement formal procedures like CVAs or administration that can stop the liquidation process. They act as a mediator to find a feasible solution for both parties.

Yes, HMRC may agree to a Time to Pay arrangement, allowing your business to repay tax debts over an extended period while avoiding liquidation. Demonstrating a commitment to resolving the debt is key to negotiating such an agreement.