We are often asked by the directors of companies that have serious financial difficulties why creditors would serve a winding up petition for compulsory liquidation against companies that have no assets.
Although it can be difficult to understand, creditors do liquidate companies with no assets, and we want to discuss why this can happen.
As a director in this position, the question is a logical one: if the company is struggling to pay its debts, and doesn’t have any assets, there are unlikely to be any funds released by liquidating it for the creditor to gain from the winding up process. Petitioning to wind up a company is a fairly expensive process, and many directors don’t understand why creditors would pursue a petition that is going to cost them further money that they might not recover.
All of the above is true, but you should understand that the reasons for creditors bringing winding-up petitions against companies are varied. HMRC in particular, who is the biggest issue of winding up petitions, will often do so in situations where the company in questions has no assets to be realised.
HMRC Have a Public role in Enforcing Sanctions
When HMRC are involved, you should understand that they will wind up your limited company in response to tax debts that are owed even if there is no prospect of them receiving the monies owed from the liquidation process.
The main reason for this is because HMRC sees themselves as having a public role in enforcing sanctions against those who do not pay their taxes in full and on time. In making an example out of those who cannot pay, HMRC seeks to encourage others to ensure that they comply with their tax obligations. This is not to say that HMRC are malevolently trying to destroy businesses, but they can, and do, wind up companies to make an example of them.
If your company is struggling, it’s likely that you will be aware of it before things get to the point of no return. HMRC will have sent a number of letters about the unpaid tax, and may even have seized some of the company’s assets to sell and repay the outstanding tax balance.
When the company is struggling to pay its bills, it can be tempting to see the payment of tax as a low priority and re-allocate money that should be used to pay HMRC elsewhere within the company. HMRC, understandably, take a very dim view of this and take steps to discourage it by making the repercussions for those who do this very severe.
It’s always HMRC’s priority to try and reduce the so-called “tax gap”: the difference between the tax revenues they expect to receive in any given tax year, and the amount that they receive. One of the ways that they seek to do this is by encouraging companies to pay in full and on time and making it a serious problem when they do not.
Other creditors may be more reluctant to subject a company to compulsory liquidation where they are unlikely to receive any repayment of debt, but often feel like they are left with no choice if the company’s representatives refuse to engage with them or have made a string of empty promises about the unpaid debt. It’s always important to try and explain the situation, rather than ignore the situation as can sometimes be tempting.
Responding to the Threat
You should never assume that because your company has no assets, it will not be subject to compulsory liquidation for the reasons outlined above.
If you are in the position where HMRC or any other creditor is threatening to wind your company up, you need to take immediate action without delay. It may be that you can negotiate a Time to Pay Arrangement with HMRC or extended payment terms for other creditors. Alternatively, you may want to consider steps such a Creditors’ Voluntary Liquidation or a Company Voluntary Arrangement.
If you would like to speak to someone for a no obligation discussion of your circumstances, please call us on 0800 074 6757 or use the live chat on the bottom right-hand side of the screen and we will be happy to help.
Useful Resources and Related Content
Advertisement of Petition to Wind Up (Rule 4.11 (1)) Form 4.6: https://www.legislation.gov.uk/uksi/1986/1925/article/4.11/made
Petitions to Wind Up Companies – What is this notice: https://www.thegazette.co.uk/insolvency/content/129
Examples of Winding Up Petitions: https://www.thegazette.co.uk/insolvency/notice?noticetypes=2450