How should a director react?
It’s called a winding up petition and is a demand for the repayment of overdue debts but it comes with the additional threat of closing a business down if they don’t repay after one has been issued.
There are several courses of action a business owner can take if they receive one but we need to be clear about what a clear and present danger to the future of the company receiving one is.
Even if liquidation is ultimately avoided, this doesn’t mean the company can escape being harmed or damaged by the experience.
They could still see business bank accounts frozen, restrictions on trade issued by suppliers, their public reputation suffer once word gets out and staff possibly leaving if they think they could be looking at redundancy soon.
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It’s true that the use of winding up petitions has been restricted under CIGA (the Corporate Insolvency and Governance Act 2020) but these have been loosened since October 1st 2021.
Now the following actions can be taken by creditors:-
- Serve a winding up petition – if the company owes £10,000 or more in unpaid debt to the creditor
- Issue a statutory demand to the company – the aim of which is to prove the company is insolvent because of its inability to repay its debts
There are some caveats including:
- The creditor must first serve notice on the company asking them to make a satisfactory proposal to repay the debt within 21 days
- If the unpaid debt relates to any outstanding commercial rent which has built up as a direct effect of the coronavirus pandemic on the debtor business then the petition will be unenforceable until March 2022 at the earliest – this is when a restriction on landlords being able to enforce forfeiture of commercial leases due to non-payment is lifted
- If the total debt is more than £750 and less than £10,000 then March 2022 will also be the earliest date when a winding up petition can be presented for this amount
For companies already juggling renewed Covid-19 restrictions during one of the busiest trading periods of the year with possibly more to come – a winding up petition is literally the last thing they would want to see.
You’ve received a winding up petition – what can you do now?
The first thing to do is to get some impartial, professional advice from a licensed insolvency practitioner.
They will be able to suggest one of the following courses of action but will be able to give guidance based on the exact specifics of the situation.
Generally there are five proven strategies for effectively dealing with a winding up petition if the debt is beyond dispute.
- Repayment
Now this might not be feasible for every business but if the recipient pays off the outstanding amount within seven days of receiving a winding up petition, including costs, then the matter is closed.
If the debt is settled after a seven day period then it might already have a hearing date at the local court.
In which case, you will have to attend and present evidence that the debt has been paid off in full. Unfortunately a verbal agreement doesn’t count so some documentary evidence will be required by the court.
Another thing to bear in mind here is that the hearing will be advertised in the London Gazette and even if the debt is settled, other creditors might join or adopt the petition for themselves to seek repayment.
This is called a “change of carriage” and means the hearing will proceed but it will be about the new debt, not the one that’s just been paid.
- Set up an informal arrangement
If the business is able to repay the debt although not immediately or in one instalment, it might be possible to reach an informal payment arrangement with the creditor.
Remember this has to be adhered to and will probably include the creditors’ costs too so might not be ideal if it will be a struggle to repay.
- Ask for an adjournment
An adjournment will give the debtor more time to pay the debt and will be granted if there are reasonable grounds to back it up.
This can include if the debtor is planning to repay via funds from an assets sale or other third party funds. They can also be granted additional time if they need it to put a CVA in place.
- Reach an agreement through administration or a CVA
Entering administration automatically freezes all creditor actions against a business including winding up petitions as part of a moratorium. During this time, an external administrator will be able to come up with the best strategy for the business to proceed.
Alternatively, directors might prefer to enter a Company Voluntary Arrangement (CVA) arrangement.
This allows a business in debt to reach an agreement with creditors to repay a proportion of the debt over a longer period, usually five years.
While they can be agreed before any winding up petition hearing, usually an adjournment is needed to give the necessary time for an administration or a CVA to be properly prepared by a licensed insolvency practitioner and agreed by all parties.
- Place the company into voluntary liquidation
If it is unlikely that the business will be able to raise the money to repay the debt then the most efficient strategy would be to enter a Creditors Voluntary Liquidation (CVL).
Implementing a CVL would provide the necessary time to reach an agreement with the creditors as well as being able to handle all the additional necessary tasks including any redundancies, settling personal guarantees, directors loans and any lease terminations that would arise.
Time to act – quickly but carefully
Things are getting tighter for a lot of businesses and the forecast for Christmas is looking more challenging by the day.
Increasingly tough circumstances can force businesses to make decisions they otherwise might not have made previously, including chasing debts a lot harder than usual which could mean issuing winding up petitions, even with the current restrictions.
Every business owner and director facing this environment needs to be alert to the changing of the mood and prepare themselves and their companies accordingly.
The easiest and quickest way to do this is to get in touch with us and take advantage of a free initial consultation.
After speaking with one of our expert team of advisors, you’ll have a better idea of what you can do – right now – to make your business stronger and more resilient this winter, no matter how strong the following winds become.