What is Winding Up

Winding Up is the process that can be used by one of a company’s creditors to force it to close. It is also known as compulsory liquidation.

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When is Winding Up used?

Winding Up is used to force a company to close without the agreement of the Directors or Shareholders. The application is normally made by one of the company’s creditors.

Generally the process is used as a last resort. The creditor will have exhausted all other attempts to collect an outstanding debt. They may now believe the company is insolvent and so should no longer be allowed to trade.

A creditor can also use the threat of Winding Up as a debt collection too. They may think it will pressurise the company into paying a debt. The mere threat of Winding Up can be a very powerful payment motivator.

Winding Up can also be used if a creditor feels that the directors have acted improperly. Once the company closed the Court appointed Liquidator will investigate the Directors conduct.

The cost of Winding Up a Company

The cost of winding up a company can be considerable. Firstly the creditor will normally require the assistance of a solicitor to lodge the petition and assist at the Court Hearing. The minimum cost of this will normally be £1000.

In addition the creditor will have to pay a Court Fee of £280 and a Court Deposit of £1600. As such before the process even starts the cost will be nearly £3000. As such the decision to wind up a company must be taken very carefully.

It may be unwise to start winding up proceedings if you hope to recover a debt unless you have a charge or truly believe the company is solvent.

If a company is wound up and then proves to be insolvent the petitioning creditor is unlikely to recover any unsecured debt they are owed. They may also be unable to recover the cost of the Petition.

What happens to Company Debt after Winding Up?

If the Court agrees the company should be closed they will appoint a Liquidator. The Liquidator is responsible for collecting in any money owed to the company and for selling any assets.

The cash realised will first be used to pay any Charge holders. The Liquidator will then use any remaining funds to pay their fee. Next the costs of the petitioning creditor are refunded.

Unless they have a legal Charge the debt owed to the petitioning creditor is treated in the same way as all other unsecured creditors.

If the company is insolvent it is unlikely that unsecured creditors will receive any of the money they are owed even if they are the petitioning creditor. They will normally have to write off any unpaid debt.

Are HMRC likely to Wind Up a Company?

If debts such as PAYE or VAT are in arrears and a Time To Pay arrangement cannot be agreed HMRC is likely to initiate the Winding Up process.

HMRC will not necessarily hope to recover any of the debt owed. Rather they resort to this form of action because they simply want to stop the company form trading. They have a duty to prevent their arrears getting any worse.

HMRC are likely to expect the Liquidator to conduct a thorough investigation of the conduct of the directors. As a result the Insolvency Service may apply to the Court for the director’s disqualification. In addition the directors may even be held personally liable for some of the HMRC debt.

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