Winding up petitions are not always the end of the road

9th October 2015

Receipt of a winding up petition at the company’s registered office can often herald the “beginning of the end” of a business. Unless the directors take swift and proactive steps to deal with the petition and thereby halt the liquidation process, the company will quickly find itself with the doors to its trading premises firmly locked; staff dismissed and the directors sitting before the Official Receiver to give an account of the company’s assets and liabilities.

From the viewpoint of a creditor owed a debt of at least £750 by the company, presentation of a winding up petition is a highly effective method of either pressurising a company into repaying a debt or pushing it into liquidation. The process not only requires service on the company’s registered office, but it must also be advertised in the London Gazette and it is the advertisement of the petition in this way that can have a dramatic effect upon the operation of the business.

The advertisement of the petition must be effected between 7 days after service and 7 days before the court hearing date.  Once the petition has been advertised the hearing must take place, therefore early dialogue is key.

The advertisement will also be picked up by the company’s funders who review the London Gazette as a matter of best practice.  Once they are aware of the petition they are required to freeze the company’s bank account unless the court allows certain trading payments to be made via a Validation Order.

Swift action is therefore crucial. The question is: what alternative strategies are available to the company in these circumstances?

Company options

The options will of course vary from company to company as the approach taken will depend upon the financial position of the business,  but they can be broadly categorised as follows:-

  1. Non-Insolvency Options

Payment of the costs and debt of the petitioner in full or in part

Until the petition is advertised, the company can try and negotiate with the petitioning creditor and, if successful, can agree to have the petition withdrawn and dismissed.

This approach will be subject to a number of factors including the amount of debt, the stance of the petitioner and the ability to pay something realistic.  HMRC are reluctant to accept time to pay arrangements where a petition has already been presented but other creditors can be more sympathetic.  It is also important to assess whether the business has underlying issues.  Sometimes, making a payment to one creditor may not be the long term solution and will only worsen the immediate cash position of the business.

Doing nothing

The liquidation process is initiated by the presentation of the petition.  If the directors decide to ignore the petition, that process will continue until its conclusion – which means that the company will be wound up at the court hearing date and placed into compulsory liquidation. The liquidation will initially be dealt with by the Official Receiver.  The directors’ ability to control the process will be lost.

  1. Formal Insolvency Options

Alternatively, the directors may be best advised to enter an insolvency process.  There are a range of options available to any situation as summarised below.

Company Voluntary Arrangement (“CVA”)

A CVA is a compromise between a company and its creditors where the directors remain in control and typically propose a repayment to creditors over a period of time.  Where a petition has been presented, it is beneficial to try and have the proposal considered by creditors before the petition hearing date, although it is not uncommon to obtain an adjournment of the hearing whilst a proposal is being considered.

Administration

Administration is a rescue tool which allows a viable business to be protected from its creditors and ultimately be sold as a going concern.  Once a winding up petition has been presented, the directors can only obtain an Administration Order through an application to court.  This can take time which is not ideal when a company is under pressure from creditors.  Taking action sooner rather than later is therefore critical.  If the application is successful, the winding up process will be halted and the petition dismissed.

Alternatively, the holder of a floating charge (in practical terms, a bank or invoice finance provider) can appoint an Administrator notwithstanding the presentation of the petition although the appetite to do this varies between funders and may not always result in the directors’ choice of insolvency firm being appointed.

Creditors’ Voluntary Liquidation (“CVL”)

Where there is no viable business to protect, the directors can seek to retain control and place the company into CVL.  This will often require the consent of the petitioning creditor and it is normal practice to pay the costs of the petition either before, or as an expense of the liquidation.  HMRC are often agreeable to this course of action where they are content with the proposed liquidator, there is no prior history of crown debt issues and the petition has not yet been advertised.

It is possible to place the company into CVL without the consent of the petitioner but the risk is that the hearing of the winding up petition will still go ahead and the company will be at the mercy of the judge to decide whether to dismiss the petition or make the winding up order if it is considered to be in the best interest of creditors.

How Leonard Curtis Lifecycle can help?

The team at Leonard Curtis Lifecycle have a wealth of experience in advising directors and funders on how best to deal with potential insolvency situations and which of the options outlined above would be the best solution for a particular scenario.

In addition, Lifecycle’s other specialist teams can help directors solve problems and hopefully avoid insolvency altogether. Our team are experts at negotiating time to pay arrangements with HMRC and other key creditors while our debt finance partners at Reach Commercial Finance can help raise additional finance which may be vital in securing a turnaround.

So, whilst the presentation of a winding up petition undoubtedly causes a very serious issue for a company, it is not necessarily terminal for a business. Early contact with the Lifecycle team is vital to explore the full range of possible solutions.  You and your clients need to be aware of petitions, what service entails and the effect of doing nothing.  This will then allow the directors to have a much greater influence on the outcome for the company.

To find out more about the corporate restructuring and insolvency support we offer our Lifecycle members, click here.

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