When a company hits financial difficulties, there are many options to restore stability to its cash flow. However, sometimes an obstacle will prove insurmountable and a business will find itself facing a winding up petition. This is a legal document presented to a court, which on approval will result in an order forcing the company into liquidation. It is normally the last step taken by a creditor after all other efforts to secure payment have failed: partly because it is comparatively expensive (fees of between £300 and £800 plus a court deposit of nearly £1200) and partly because the creditor may only secure pennies on each pound it is owed.
So what are the steps involved and how should they be dealt with?
The winding up petition is presented
Any creditor owed more than £750 can issue a winding up petition, though in practice the debt will normally be higher than the cost of issuing the petition. Winding Up Petitions can commonly be issued by HMRC in accordance with VAT Arrears. It is important to tackle the possibility of becoming insolvent before HMRC hits. Once a petition has been submitted either via HMRC or a normal creditor, the court will review it, and if it is approved forward it to the insolvent company.
Seven days to respond
There are a number of steps that can be taken once a winding up petition has been received, but you will need to act quickly: the court will issue the winding up order in just seven days. This week’s breathing space is designed to allow you to pay the debt in full, negotiate an arrangement or dispute the sum requested by the creditor.
Once the winding up petition has been issued, you can only undertake a creditors’ voluntary liquidation (CVL) with the creditor’s permission and cannot sell the company or it assets. However, it may be possible to propose a Company Voluntary Arrangement (CVA), which we will discuss further, or ask your lawyer to challenge the debt.
If you can demonstrate that the company is viable, you may be able to enter the administration process, whereby an external manager trained in insolvency will take over the business and creditors will be prevented from demanding repayment for the time being. The administrator will consider every option: rescuing the business as a going concern, finding an acceptable outcome for creditors in lieu of winding up, or winding up and selling the assets. A CVA is another possible outcome, in which case the business would continue to trade.
The winding up petition is published
By law, the petition must be advertised in the London Gazette, though it may be possible to delay publication by negotiation with the creditor. In any case, the winding up petition must be published at least a week before the court hearing.
Assets and accounts are frozen
Publication will alert your bank to the insolvency and they will probably take action to prevent the illegal sale of assets. This is normally done through the freezing of your bank accounts. In many cases, banks study court registers to view pending winding up petitions, and will sometimes take action even before petitions are published.
The winding up order is granted
If the court grants the winding up order, an Official Receiver will be appointed to act as liquidator. The business is no longer a going concern and the Receiver will look at realising its assets and making a distribution to creditors. He or she may also investigate the directors’ actions to see whether they were trading while insolvent; in extreme cases, this can lead to a conviction and a 15 year ban from taking up directorships, or alternatively to personal liability for the company’s debts.
However, there’s no need to let things get this far.
How Cashsolv can help
Cashsolv are specialists in Company Voluntary Arrangements (CVA), which allow businesses facing winding up petitions to reach a compromise on the payment of debts. This is a highly flexible approach, allowing your company to replace its standard terms of business with a new arrangement: for example, paying a fixed monthly sum for three years to meet 75% of outstanding debts.
For smaller companies, we can arrange a moratorium, giving a defined period in which to propose and implement a CVA without the risk of proceedings from creditors. Larger companies may seek similar protection through the administration procedure.
A CVA generally provides the best possible outcome for a company with heavy debts or a serious liquidity problem, and may also be the best outcome for creditors – for this reason, they are often quick to agree to it.
To discover how Cashsolv can help, please visit our Company Voluntary Arrangement page.