Help, I haven’t paid a creditor and they have now issued a winding up petition
A lot of people may think that if they have reached the point where there is a winding up petition presented against their company that they have no options left, and that liquidation is inevitable. This does not need to be the case, and by seeking proper business finance advice it may be that an alternative solution can be found. This could be for example by getting an emergency business loan, recovering money through effective debt recovery or negotiating more time to pay the debt, or a combination of all options.
When should advice be sought after receiving a winding up petition?
The key is to act as quickly as possible by seeking professional advice. The petition can be advertised 7 days after it has been delivered to the company and this will result in the company’s bank account being frozen. It is best to seek advice prior to this, ie when the petition is first received, rather than letting it get to the point where the bank account can no longer be used. Although there are still options once the petition has been advertised, things do become more difficult, particularly as other creditors could add themselves to the winding up petition once they know about it.
What happens if I don’t get advice?
Once the winding up petition has been served and advertised by the petitioning creditor, and the company’s bank account has been frozen, it is unlikely that the company will be able to continue to trade and this will put your livelihood at risk.
The winding up petition will set the date for a court hearing, unless a settlement has been reached or the judge believes there is good reason for the debt not to be paid a Winding Up Order will be issued.
Once the winding up order has been made by the court, the company will be finally closed and its assets sold to pay its debts. The court will put an official receiver in charge of the liquidation. They will start the process of turning the company’s assets into money that can be used to pay the company’s debts. The official receiver will review all transactions from the date of the petition up to the date of the winding up order to consider whether any of the transactions should be automatically reversed.
Once the winding up petition has been advertised, the directors will very quickly lose control, and therefore action should be taken quickly to avoid this.
So what are my options following a winding up petition to avoid the compulsory liquidation?
If the entire debt is disputed, or the undisputed part is less than £750, this can be presented to the judge to consider dismissing the petition. There must be substantial proof that the debt claim is unfair or inaccurate. As the effect of getting it wrong could mean the end of the company, it is vital to get the paperwork correct and unless the director is fully knowledgeable he should not try to do this without proper advice.
If the debt is undisputed then it would need to be paid in full straight away or acceptably structured over time. The usual issue here is cash, not least because the bank account might be frozen! If there is a viable underlying business then an emergency loan may well be a way to repay the debt. Emergency business loans are not a long term funding solution, but instead are a short term answer when the company is starved of cashflow. For example, if the company has a debt due in from a customer, the business loans can be used whilst this debt is pursued.
Many directors are fearful of pushing too hard on debt collection, as they are worried that by chasing debts too hard the customer will go elsewhere. By using intelligent debt collection, these debts can be recovered and the customer retained. Customers know that they need to pay, but if they are having cashflow difficulties themselves, or are simply happy to use your money to fund their business, they may put payment off until they are appropriately chased.
There may also still be time to negotiate with the creditor to compromise the debt. In a compulsory liquidation the creditor may be likely to only receive a small percentage of their debt back, but by reaching a compromise both sides win. The creditor receives a higher return and the company is able to continue to trade. This negotiation needs to be handled properly and a formal agreement reached to be able to satisfy the court.
It is likely that if one creditor has issued a petition that there may be others with outstanding debts, it could therefore be a good time to get all of the creditors under control in the form of debt management plan, using a formalised debt management plan. This will enable the debts to be paid over time, freeing up your time from dealing with lots of individual creditors and improving your cash flow.
Rather than having to spend a lot of time negotiating individually with creditors, the negotiation can be undertaken on a low cost basis by professionals who are accustomed to undertaking the work. This will enable you to focus upon what is important, winning sales and running the company.
Finally, if the company needs more than twelve months to pay the debt, then the company could arrange and propose a Company Voluntary Arrangement (CVA) to come to an agreement with the petitioner and other pressing creditors, including HMRC. Such an arrangement could allow the debt to be repaid over a period of up to 5 years. This could also be combined with getting some long term funding for the company and undertaking proper timely debt collection.
Have I left it too late to address a winding up petition?
Even up to the day before the hearing, action can still be taken and it is possible that the hearing could be adjourned whilst other options are explored. This is a risky option though and the best option is to take early advice to avoid the liquidation of the company as soon as you receive the winding up petition.