Winding Up is the process of forcing a company to close. Threatening to apply for a Winding Up Petition may therefore be a used to pressure companies into paying outstanding debts.
- Can the threat of Winding Up be used to collect debt?
- Will a creditor apply for a Winding Up Petition?
- Will outstanding debts be paid after Winding Up?
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Is threatening Winding Up a useful debt collection tool?
The threat of Winding Up may be enough to scare a company into paying an outstanding debt. If a Winding Up Petition is granted the company will find it extremely difficult to trade. The main reason for this is its bank account will be frozen. This will prevent payments being made either in or out of the account.
The company is also restricted from selling any of its assets. On top of this shares can no longer be transferred. The only way to then prevent the company from being closed is for the Directors to mount a defence at a Court Hearing. The cost of this will have to be paid by the Directors themselves.
The directors of the company will normally want to avoid these problems. In order to do so they will often feel they have no choice than to pay the debt owed.
Is a Creditor likely to go through with Winding Up?
Whether or not a creditor will actually apply for a Winding Up Petition usually depends on two things. Firstly the size of the debt owed. Secondly whether they believe the company really does have sufficient resources to pay the debt.
Generally speaking it is not sensible to use the winding up process if an outstanding debt is small. It will cost around £3000 to apply for the Petition. These costs may only be recovered if the company is solvent.
After a Petition is granted there is a Court Hearing. If it is decided to close the company the petitioning creditor is not treated preferentially. Unless they have security they will be classed as an unsecured creditor. If the company is insolvent they are then very unlikely to be paid.
Given this unsecured creditors are unlikely to apply for a Winding Up Petition if they believe the company is insolvent. The exception is if the creditor is simply determined to force the closure of the business. HMRC are one of the few unsecured creditors who will routinely apply for a Winding Up Petition for this reason.
The threat of winding up from HMRC must be treated very seriously. Their motivation is to close the company and force an investigation into the Director’s conduct.
If a Company is Wound Up will outstanding debts be paid?
If a company is closed its outstanding debts can only be paid if funds are available. Creditors with security such as a fixed charge over their debts will be paid first. Then the Liquidator will take their fees. Then costs of the petitioning creditor will be paid.
Only after these preferential payments have been made can any remaining funds distributed amongst the remaining unsecured creditors.
All unsecured creditors are treated equally. Any remaining funds are distributed between them on a pro rata basis. If the company was insolvent there will be little or no funds available at this stage. As such it is unlikely that the petitioning creditor will recover any of the original debt that they were owed.