How to Stop a Winding-up Petition

In short:

The most important thing to do when receiving a winding-up petition is to act quickly. There’s only a short period of time (seven days) you have in which to stop one.
Compulsory liquidations following winding-up petitions can be very invasive, with liquidators investigating up to the last seven years of trading.
You can avoid a winding-up order by disputing the petition, paying off the debt, entering voluntary liquidation, a CVA or administration, though some of these options are more effective than others.

Receiving a winding-up petition can be a confusing and stressful experience, but it needn’t be the end of your company.

As one of the most serious actions HMRC can take against a company, a winding-up petition certainly isn’t something a business owner can ignore in the hope it will go away. However, if you can act quickly enough, you may be able to avoid some of the problems a petition poses.

What is a winding-up petition?

A winding-up petition is instigated by a disgruntled creditor of a business. If they have not been paid on time or suspect that they might not get paid at all, they can petition the courts to forcibly close the company down.

This act of closure takes the form of a compulsory liquidation via a court process.

The creditor’s petition is presented to the court and then reviewed by a judge who will decide whether it should be pursued. Once the judge issues the winding-up order, it starts a process in which the official receiver (or a government official) is appointed to liquidate the company assets. The funds raised from selling these assets then goes toward repaying creditors.

How do you stop a winding up petition?

It’s possible to stop a winding-up petition, but recipients need to act promptly. There is a grace period of just seven days before the court issues the order to start liquidating a company.

Once the court has issued the winding-up order, it can’t be stopped, so it’s important to act before it gets to this stage.

But how do you stop a winding-up petition?

There are five different routes you can potentially take. Insolvency expert and Senior Client Manager at Forbes Burton, Ben Westoby, gives his opinion on each option below.

Dispute it

“If there’s substantial proof to show that the claim is either inaccurate or unfair, then this should be your first port of call” Westoby says.

“You should be aware, however, that by disputing a winding up petition, you are making a serious allegation against the creditor. If it’s found that they have fabricated their claim or misled authorities in any way they can be charged with abusing the court process.”

Pay the debts

It almost goes without saying that if the company has the money to pay the amount, it should do so promptly in order to save the company.

“However, you must be wary of showing preference when paying creditors” Westoby warns.

“Paying only the creditor that issued the winding up petition can be classed as wrongful trading. We’ve seen unscrupulous directors try this regardless, only to have their other creditors take over the petition anyway.”

Enter a creditors’ voluntary liquidation (CVL)

Westoby explains that “in the majority of cases, a CVL is the most suitable solution for clients”.

This is a method of liquidating the company on your terms. It’s a particularly good option if you believe that the business model is still viable as it leaves open the possibility of buying back the company’s assets for a future venture.

“It may seem like a case of simply swapping one form of liquidation with another, but there are some crucial differences between the two” adds Westoby.

“Along with it making starting again much easier, a CVL is far less invasive and allows the director greater control over the process.”

A compulsory liquidation brought about as a result of a winding-up order is overseen by a third party that is duty bound to dig into the business records and director’s affairs to check for any wrongdoing.

Of course, the drawback of a CVL is that it costs the director a fee to hire a liquidation firm. Westoby reveals that this can be easily overcome if the director has been employed by the business for at least two years. “In these instances, the whole process can often be funded by the director’s redundancy payment from the business.

“The average payout is somewhere around £9k, which more than covers any liquidation costs.”

Enter a company voluntary arrangement (CVA)

Liquidations aren’t always guaranteed to raise enough funds to pay off all of a company’s creditors.

That’s why creditors can sometimes be amenable to the idea of being paid back a slightly smaller figure over a longer period of time. By the stage in which a winding-up petition has been issued though, they’re unlikely to agree to anything like this without a CVA in place.

This is because it’s a legally binding arrangement (overseen by a licensed insolvency practitioner). Having one of these in place can allow a company to pay back the money owed to its creditors over an agreed period of up to five years.

Going down this route escapes liquidation altogether, so why don’t we recommend this approach to every client?

Westoby explains that “CVAs are brilliant insolvency tools that can allow businesses to survive difficult circumstances. Unfortunately, we find that without significant restructuring efforts, many businesses that enter into a CVA tend to fail further down the line as the business model was flawed in the first place.

“What’s more, it can be very difficult to get every element of a CVA put in place within the seven-day period allowed. If the client comes to us straight away after receiving notice however, it can be possible, with the courts even able to grant a short pause on proceedings sometimes.”

Obtain an administration order

If your company is put into administration, a licensed insolvency practitioner is appointed to evaluate and sell company assets with a view to continue trading.

An administration order has the effect of freezing all legal actions against the company. This means that the court is unable to issue a winding-up order while the company is in administration.

Westoby warns though that administration is hardly a magic cure-all in the face of a winding-up petition. “It can be an expensive process that provides no guarantees that the creditors won’t still be knocking on the door after the administration period ends. At best, it’s a means of delaying the inevitable in most cases”

I’ve been served a winding up petition. What should I do?

The answer will depend on your company, personal situation and future plans. Whichever option you take though, immediate action must be taken if you plan to avoid your company being closed by a creditor.

Of the options listed above, we usually tend to recommend entering into the process voluntarily via a CVL and retaining more control over the situation.

A company voluntary arrangement (CVA) can seem very attractive, but often isn’t practical in circumstances such as this.

This is because the likelihood of instructing an insolvency practitioner and compiling your CVA terms, let alone ensuring that the creditor agrees to them within the seven-day period available, are very slim.

That being said, it’s not impossible, and your chances are greatly improved by seeking help immediately after learning of the winding up petition.

Who can issue a winding up petition?

Winding-up petitions can be issued by any creditors as long as they are owed at least £750 by the business in question and can show that they’ve made satisfactory attempts to recover the money themselves beforehand.

In rarer cases, they may be applied for by directors or shareholders should they believe that their company is insolvent.

In the majority of cases, however, the creditor issuing the petition is HMRC. These cases are are often pursuing a large debt, such as PAYE or VAT arrears, which hasn’t been repaid despite continual chasing.

What’s the difference between a winding-up petition and a winding-up order?

A winding-up petition is passed over to the courts. If the debt still hasn’t been paid and the judge decides that the petition has merit, then they will issue a winding-up order to close the company in question.

What happens if a winding-up petition is ignored?

Once the winding-up petition has been approved (after 7 days), a court order is made. The official receiver will be appointed who liquidates the company’s assets to pay HMRC’s (along with any other creditors’) debts.

They will then investigate the director’s actions during the time leading up to the liquidation. This period could encompass up to seven years prior to the administration.

The official receiver is tasked with making claims against the company’s director if evidence of misconduct is found. Should the director then be found guilty of any wrongdoing, they could be banned from acting as a company director for up to 15 years.

Can a winding-up order affect me personally?

If none of the above options have proved suitable or you simply haven’t acted quickly enough, the winding up order will be issued. From this point, there is nothing that anyone can do to stop the company from being forced into liquidation.

Before it gets to this stage, directors should be aware of the ways in which a winding-up order could affect their personal life.

While limited companies provide a degree of protection from any business matters affecting their directors personally, a winding-up petition can lead to a fairly invasive liquidation process.

The official receiver (OR) has a duty to investigate the company director(s) after liquidation, going back to actions taken up to seven years prior to that point.

The most common way in which directors come under fire is due to actions taken during the period leading up to insolvency.

For example, unless specific steps are taken and recorded, trading while insolvent is one of the offences that liquidators often find, and can be classed as wrongful trading.

There are a handful of other ways in which a winding-up order can affect directors personally, however. The most common are listed below.

Personal liability notices (PLNs)

PLNs (personal liability notices) are becoming ever more widely used by HMRC to secure tax payment. They are often used in support of a winding-up petition.

Essentially, a PLN makes it possible to breach the corporate protection of a limited company and make directors (or the employee responsible for control over tax) personally liable for their company’s tax debts.

Recently, PLNs have been used in cases where HMRC suspects the company is insolvent and cannot, or will not, pay the amount owed. The personal liability notice can be made on a joint basis, so several individuals could possibly become liable for the tax debt.

Preferential payments

One of the most common misconduct claims made against directors are preferential payments.

An easy mistake to make is repaying yourself or your family members for loans made to the company before paying debts to HMRC or other creditors. If the preference is proven, typically, the liquidator will ask for the money to be returned, but if this isn’t possible, more serious sanctions can be made.

There are strict laws in place that determine the priority of paying creditors in a liquidation. Deviating from this in any way can have severe consequences.

Personal guarantees (PGs)

It’s far from unusual for a director to be asked to personally guarantee the amount they’ve promised their company will pay back. Once a personal guarantee has been signed, the lender is able to pursue the director personally if the debt is left unpaid.

Unfortunately, there are a lot of cases in which the directors are unaware of these guarantees, which are often hidden away in terms and conditions.

What’s more, with a personal guarantee, creditors usually have the power to demand the money you owe to them with immediate effect.

The best thing to do in this situation is to seek out professional help, ensure that the guarantee is valid, and negotiate a settlement between yourself and the creditor. This option is often preferable for creditors, as legal action is expensive and takes time.

Overdrawn directors’ loan accounts (DLAs)

These can be a real cause for concern when it comes to liquidation. Where HMRC is involved, they may object to a CVA (company voluntary arrangement), unless the amount owed by the director is repaid.

This is another easy mistake to make (around 80% of insolvency cases involve overdrawn directors’ loan accounts). Once money is taken from the company when it hasn’t got enough to pay its taxes, the damage has effectively been done.

Even in cases where the loan has been written off, most official receivers would look to reverse this and ask the director to repay the overdraft in the interest of creditors. Remember that even historic cases will be investigated after liquidation, so this isn’t something that can be swept under the carpet.

Should the director be unable to repay the loan amount in full, they may have to declare themselves bankrupt.

Need to speak to someone?

If you’ve received a winding up petition, it’s imperative that you take action as soon as possible. Call us now on 0800 060 8447 for free no-obligation advice. A specialist will be able to talk you through the best possible option for your particular situation. Alternatively, you can also reach us by emailing advice@forbesburton.com