April Fool’s Day – and sadly, this is not a wind up
April 1, 2022
The end of the ban on Winding Up Petitions
One of the key measures in the government’s attempt to protect businesses badly affected by the pandemic was to insulate them from being wound up by unpaid creditors. There was a total ban on the issuing of a Winding Up Petition (WUP) from March 2020 to September 2021 and then a partial ban from then until the end of March 2022, when only debts over £10,000 could be pursued by this route and then only after a cooling off period for negotiations.
The government has now confirmed that from the 1st April 2022, it’s open season on struggling companies once more, with creditors able to issue WUPs for all debts over £750, with a very limited exception for some unpaid rent arrears. With a lot of frustrated creditors made to wait for up to two years for their money, patience is likely to be in very short supply as they scramble to recover their money.
The WUP process
A WUP is issued by the creditor and served on the debtor. Seven working days after service or at least seven days before the scheduled court hearing, the WUP is advertised in The Gazette. Thereafter, it will be heard by the court. Once the WUP has been advertised, other creditors can join in to support the petition and, even if the original petitioner is paid or decides to withdraw, can take over the petition.
Assuming no successful defence is mounted, the WUP will be approved and the court will issue a Winding Up order, putting the debtor into Compulsory Liquidation with the Official Receiver acting as Liquidator unless creditors put their own private sector nominee instead. The Liquidator takes control, realises the company’s assets and distributes the proceeds to the creditors after costs and in accordance with certain priority rules.
The impact on the company
Once a bank finds out about the issuing of a WUP, it will usually freeze the debtor company’s bank accounts, which effectively puts a stop to all trading. The banks do this because any movement of money in or out of the account could be reversed by the court, on the basis that it is an invalid transaction under insolvency legislation.
It may be possible to apply for what is called a validation order to be made by the court to unfreeze the bank accounts. However, the court will require a substantial amount of evidence and information to assess the situation before allowing this to happen.
The basic purpose of advertising the Winding Up Petition is to warn other creditors that the company is insolvent and may soon go into Liquidation. They may join in the WUP to support the petitioning creditor. In any event, creditors may withdraw credit facilities and demand payment up front for further supplies or services. Some could even refuse to do business with the company at all.
Can a Winding up petition be stopped?
Ideally, the simple answer is to pay the debt, but where this is not a practical cash flow option or the debtor does not accept the creditor’s claim, it is possible to have a WUP set aside on a number of different grounds, such as where there is a genuine dispute.
There may be a procedural defect, such as a mistake in the documentation, it has been not been served properly and it could have been advertised incorrectly. Finally, the WUP may be an abuse of process as a bullying tactic. In those circumstances, the petition can be dismissed by way of an application to the court.
What if there is no dispute but the debt cannot be paid?
In these circumstances, the debtor company can decide to go down alternative and more beneficial insolvency routes. These include Administration, a Company Voluntary Arrangement (CVA) or Voluntary Liquidation (CVL). The first two offer the potential upsides of rescuing the business and saving jobs.
In virtually every case, all of the options are likely to produce a better result for creditors than a Compulsory Liquidation following the WUP. This will be particularly important where Directors have given Personal Guarantees of their company’s liabilities, for example to a lender or a landlord.
Get professional advice – and get it early
A Winding Up Petition is not usually a surprise to Directors, who will normally be aware of any debt problems building up beyond normal collection procedures and have had plenty of warnings from creditors that they are losing patience. They may have issued a Statutory Demand as a precursor to the WUP or have threatened the company with legal action in more general terms. These are not scenarios where the threat will go away if doing nothing is done.
It is vital to take expert professional advice at the earliest moment and not just legal advice on potential defences against the WUP. One important task will be to put together a credible settlement proposal that demonstrates to the creditor the financial downside of carrying on with the WUP.
It is also important to discuss with an insolvency expert what other options are available when a debt cannot be settled or disputed, such as Administration, a CVA to creditors or a CVL.
If you believe your business is already affected by these issues or believe you might be, and you would like to arrange an initial meeting to discuss the best way forward, contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.
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