A Winding up Petition could have serious consequences for a company and its directors. It is therefore important to understand what a Winding up Petition is and what it means to receive one.
- What is a Winding Up?
- The Implications of a Winding Up Petition
- Which creditors will apply for a Winding Up Petition?
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What is Winding Up?
Winding Up is used to try and force a company to close. Any creditor who is owed more than £750 by a company has the right to use the process. They must first apply to the Court for a Winding Up Petition. The Court will review the application to determine if it is reasonable.
The creditor will have to show that they have taken reasonable steps to collect their outstanding debt. If the Court accepts their arguments the Petition will be granted. The company then has 7 days to pay. If it does not the Petition is advertised in the London Gazette.
If the company is registered in Northern Ireland or Scotland the petition is advertised in the Belfast or Edinburgh Gazette.
The Court will then decide whether or not the company should be closed. If this decision is made a Winding Up Order is issued. A Liquidator is then appointed and starts the closure process.
The implications of a Winding Up Petition
There are significant consequences after a Winding Up Petition is advertised. Even if the company can pay the debt owed serious disruption is likely to be caused.
Company Bank Accounts Frozen
Once a Winding up Petition is advertised the bank will automatically suspend banking facilities. Further payments can then not be made or received without permission of the Court. The company is not allowed to sell any of its assets and shares must not change hands.
Potential closure of the Company
After the Petition is issued the Court will set a date for a Hearing. Both the Directors and creditor have the opportunity to present their arguments. The Court will then make a decision as to whether the company should be closed. If the Court decides this should be the case a Liquidator will be appointed immediately.
As well as closing the company the liquidator’s duties include reporting on the conduct of the Directors. If the liquidator believes that any director has acted inappropriately a further investigation may then be carried out. This could result in the director being disqualified.
A disqualified director may be held liable for some of the company’s debts. Generally this is limited to debt incurred from the time they knew or should have known the business was insolvent.
Which Creditors will apply for a Winding Up Petition?
After the receipt of a Winding Up Petition the company may be forced to close. However this will not necessarily result in the creditor getting paid. If the company is insolvent they are likely to struggle even to recover the costs of applying for the Petition.
Given this there are two reasons why a creditor will try to Wind Up a company. The first is that they are convinced it is solvent and in a position to pay its debts. In these circumstances the fact that a Petition is granted will normally force payment.
The other reason is that the creditor simply wants to see the company closed. They understand that they are unlikely to receive payment for their outstanding debt. However they want to ensure the business stops trading and that the Liquidator investigates the Director’s conduct. HMRC will often apply to wind a company up for this reason.