What does winding up mean for Companies and Company Directors?

Winding Up Petition and Winding Up Order – What does winding up mean for Companies and Company Directors?

What is a winding up order?

A winding up order is the last stage of the process after being given a company winding up petition. A court-ordered petition can be sent to the company by any creditor that’s owed £750 or more, after which they’ve got 7 business days to pay the debt, come to a repayment agreement or proceed with the winding up order. Once this order has been given, the process of liquidating the business has begun – the company winding up process involves the appointment of a liquidator who will make all employees redundant before selling any assets to pay back the creditors, signalling the end of the business.

Winding Up Petition and Winding Up Order – What does winding up mean for Companies and Company Directors?

Winding up is the name given to the process of forcing the closure a limited company. Usually winding up is used where one or more of the creditors of a company want to force it to be closed. The other term for this forced closure is Compulsory Liquidation.

Any creditor who is owed more than £750 can apply to the Court for a company to be wound up. The creditor action is called petitioning for the winding up of a company. As such, the first step of the process involves the creditor applying to the court for a winding up petition.

If a company receives a winding up petition, this can have very serious consequences for both the company and its directors. It is therefore very important to understand what a winding up petition is and the implications of receiving one.

The three main effects of Winding Up a company

There are three main areas that company directors need to be aware of:

Freezing of Company Bank Accounts and Assets

Under section 127(1) of the Insolvency Act 1986, if a company is wound up, any sale of the company’s property, any transfer of shares, or any alteration in the status of the company’s shareholders, made after the commencement of the winding-up is void, unless otherwise ordered by the court.

This means that it is very difficult for a company to continue to trade after a winding up petition is issued.

Director Investigation

Once a company has been ordered to be wound up by the court, the appointed liquidator must investigate the activities of the company directors to ensure that they have acted properly and according to their legal duties. If the liquidator believes that the directors are guilty of wrongful trading they may recommend that the directors are banned from all current and future directorships for a period of time. This is commonly known as striking off.

Directors personal liability for company debts

If company directors are found guilty of continuing to allow a business to trade while insolvent, they may become personally liable for the debts incurred by the company from the time they knew the business was insolvent.

The Winding Up Process

Recently, it has become more and more usual for creditors (either companies or individuals) who are owed money, to issue Winding-Up Petitions as a means of forcing payment.

Any creditor who is owed more than £750 by a company can apply for that business to be wound up in the following way:

• They must first present an application to the Court. This application is called a Winding Up Petition.
• The Court will review the petition to determine if it is reasonable. Generally the creditor will have to show that
• they have taken reasonable steps to collect the outstanding amount owed to them. For example, the Court will often look to see if a county court judgement has previously been issued but remains unpaid.
• If the Court accepts the petition, then it will be issued to the company.
• Once the winding up petition will is received, the debtor company has 7 business days to resolve the matter. This could be done in the following ways: Paying the debt and costs in full OR Reaching an agreement with the creditor to settle the debt or repay in a structured way OR Ask the court to make an order to prevent the proceedings being advertised in the London Gazette because there is a genuine business dispute.
• If one of the actions above is not carried out within 7 business days, then the Winding-Up Petition will be advertised in the London Gazette. Proceedings for the winding up of the company are seen to have started from this point (under section 129(2) of the Insolvency Act 1986, proceedings for the winding up of a company are seen by the court as having started at the time of the presentation of the petition for winding-up).
• Once the petition is issued, the company has the further opportunity to pay the debt owed or argue that the petition is unreasonable. If the debt is upheld but not paid then the Court will grant the Petition and issue a Winding up Order.
• The process to close or liquidate the business is then started. A liquidator will be appointed who will be responsible for closing the business. They will be required to make any employees redundant immediately. The liquidator will also try to sell any of the company’s assets to generate cash which is used to repay outstanding debts to the company creditors.
  The liquidator will make an investigation into the conduct of the company’s directors and determine whether they believe the directors have been guilty of wrongful trading. This investigation will be reported to the court and insolvency service in a report called the D Report.

The Effects of receiving a Winding up Petition

Recently, creditors have started to use winding up petitions specifically as debt collection tools because of the immediate pressure that this puts on the company to pay the outstanding debt. If a winding up petition is issued against a company, this will lead to significant difficulties for the company if it intends to continue to trade. The most serious of these is that the company’s assets are frozen.

Under section 127(1) of the Insolvency Act 1986, if a company is wound up by the court, any sale of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding-up is void, unless otherwise ordered by the court.

For this reason, once a winding up petition is issued and advertised in the London Gazette, the company’s bank must freeze its accounts immediately. As per the terms of section 127 (1) of the Insolvency Act, if money was released from the company’s bank account without the court’s order, this could be seen as void. The bank would be held liable for this as a loss of funds and would have to return these to the liquidator at their expense.

Clearly, the freezing of a company’s bank account and other assets will have a catastrophic effect on the business’ ability to continue trading; wages and salaries will be unpaid even when money is held in the account to pay them. A company may even have funds to pay the petitioning creditor, but cannot as the bank will not release funds.

I have received a Winding Up Petition – What Can I do?

The consequences of receiving a winding up petition are very serious for a company. Given that an increasing number of businesses are struggling in the current economic climate, far more creditor’s accounts are falling into arrears. Subsequently, the number of winding up petitions issued is on the increase. If you know that your business is about to receive a winding up petition or such a petition is received out of the blue, it is vital that you take advice from a corporate insolvency specialist as soon as possible.

Act within 7 business days of receiving the petition

A company can avoid the effects of a winding up petition by acting swiftly. It has 7 business days to resolve the reason behind the dispute. If this is achieved, the petition will not be advertised and its effects quashed.

The dispute may be resolved in one of the following ways:

• Paying the debt and costs in full.
• Reaching an agreement with the creditor to settle the debt or repay in a structured way.
• Ask the court to make an order to prevent the proceedings being advertised in the London Gazette because there is a genuine business dispute.

Action after 7 business days of receiving the petition

If there is no resolution after 7 business days, then the winding up petition will be advertised and the company assets will be frozen. However, the company directors still have the following options open to them:

Pay the Debt

If you believe the creditor’s claim is genuine, you should make every effort to pay the petitioning creditor. Once this happens, the petitioning creditor will normally agree to have the winding up petition lifted.

Of course, this may very well be to the further detriment of the business as cash will have to be diverted from other places if indeed any is available at all. Even if the company pays the debt and costs in full after the 7 day period, its accounts will still be frozen.

Contest the Action

If you believe that the petition is unjust, you can contest the action. However, this will involve hiring a solicitor with associated costs. The company’s bank account will have been frozen and so the Directors of the business will normally have to fund this process themselves.

Liquidate the Company Yourself
You may decide that the company is not worth saving and agree that it should be wound up. If this is the case, it would be sensible for you to start a creditor’s voluntary liquidation yourself thus giving you more control of who is appointed liquidator and the subsequent investigation of directors.

Apply for an Administration order or Company Voluntary Arrangement

If you and/or the shareholders of the company believe that the business is worth saving you could consider applying to the court for an administration order. If this is granted, then the winding up petition will be overturned by the court. Once the business is in administration, there is then the option to sell the assets to a new company so that trading may continue.

An alternative to putting the company into administration would be to propose a Company Voluntary Arrangement (CVA) to all of the company’s creditors. If the creditors agree to this, then the winding up petition would again be overturned.

Allow the company to be wound up

Of course, there is the option of simply allowing the company to be wound up. The liquidator would then sell any assets of the business. Any individual or company could then buy these assets to use in a current business or to start a new one.

In this scenario, company directors need to be reminded that the liquidator would present a D report on their conduct.

Accessing assets after a winding up petition is issued

Once a winding up petition has been issued, it may be advantageous for the company to continue to trade and pay its staff. Perhaps there is a specific contract or piece of work which if completed could generate additional revenue for the business which would be to the creditors benefit.

Where this is the case, it is possible for the directors of the business to apply to the court for a validation order. If issued, such an order will allow funds to be paid out of the company’s bank account and assets owned by the company such as its goods and/or services to be sold.

What can I do about receiving such an order?

Receiving a winding up order is an incredibly serious situation to be in, but unfortunately once you’ve received the order, there’s nothing you can do to stop the process – your business has effectively been liquidated. The only thing you can do is take action as soon as you’ve been issued a business winding up petition, either by paying the debt, coming to some form of a repayment agreement or contesting the petition, because unless these steps are taken you’ll have no choice but to start the business winding up process.

The importance of finding the right company winding up advice

The severity of a business winding up petition (and its subsequent order) is what makes having the right advice so important. You need to seek out that advice as soon as you receive the business winding up petition, because instant action is the only thing that could save you. There’s no question of going into denial because if you do then you’ll have no choice but to close the business, so seeking immediate company winding up advice is essential.

If you know that your business is about to receive a winding up petition or such a petition is received out of the blue, it is vital that you take advice from a corporate insolvency specialist as soon as possible.