Winding up is the forced closure of a company by one or more of its creditors. If a creditor wants to start the process they will have to follow a number of specific steps. Directors should be familiar with these so that they know how to react to them.
- Find out how to force a Company to close
- Will the Court grant a Winding Up Petition?
- When does the closure process start?
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Company fails to respond to a Statutory Demand
Before an application for a Winding Up Petition can be made a Statutory Demand must be issued against the company. This will require the full payment of the outstanding debt or a reasonable payment plan.
The company has 21 days from the date of the issue of the demand to pay the debt or reach a repayment agreement. If this has not happened by the deadline the creditor can then apply to the High Court for a Winding Up Petition.
The cost of presenting a winding up petition must be borne by the creditor. It is normally between £2000-£3000. As such it would be unusual for a creditor who is owed less than this to apply. Common exceptions are non commercial creditors such as HMRC.
Winding Up Petition granted by the High Court
When an application for a Winding Up Petition is received it will be reviewed by the Court. The Petition will only be granted if the creditor can prove that other avenues for debt collection have been exhausted. This might include failed attempts to agree reasonable payment plans and an ignored County Court Judgment.
If the Court grants the Petition the company is informed. It then has seven (7) days to either pay the outstanding debt in full or dispute it. If payment has not been made within this time notice of the Petition will be advertised in the London Gazette.
The advertising of a winding up petition will have very serious implications for the company. Not least the company’s bank will normally freeze its accounts and facilities making it almost impossible to continue trading.
A date for a High Court Hearing is then set to decide whether the company should be closed. If the directors wish to challenge this they can do so at the Hearing. Even if the debt is paid in full before the Hearing it will still take place.
Winding Up Order Issued and Company Liquidation started
At the High Court Hearing a Judge will listen to the arguments of both the creditor and the company directors. They will then decide whether the company should be closed or not.
If the Judge decides that the company should be closed they will issue a Winding Up Order. A Liquidator is then immediately appointed by the court. The liquidator will take over control of the company from the directors and start the closure process. They will realise the company’s assets for cash and make any employees redundant. They will also conduct an investigation of the conduct of the Directors.
If there is any available cash after any charge holders have been paid the Liquidator will take their fees and pay the costs of the Petitioning Creditor. Any remaining funds will then be shared proportionally between the unsecured creditors. The debt owed to the petitioning creditor is not treated preferentially unless they are a charge holder.
If an insolvent company is wound up it is unlikely that the unsecured creditors will be repaid. As such it is unwise to pay to try and wind up a company unless you are a charge holder or you believe it is solvent and can afford to pay all its debts in full.