This article follows on from the article last month on dealing with difficult debtors and the use of demand letters and statutory demands. This month we focus on winding up petitions which would generally be the next step if payment is still not made following serving a demand letter or statutory demand. We provide a rundown of what exactly winding up is, the procedure, its effects and how much it costs.

What is winding up and is it the same as compulsory liquidation?

Yes, these are the same procedures. Winding up is a court based procedure where the assets of a company are realised and distributed to creditors and shareholders. Winding up is an 'end game' procedure and once a company has been wound up it should immediately cease to trade.

Winding up begins with the presentation of a winding up petition to the court. The person or company bringing the petition is referred to as the Petitioning Creditor. The petition will be listed for a court hearing at which a judge will decide whether the company should be wound up or not. At this hearing other creditors may support the petition.

On what grounds can a company be wound up?

The two most common grounds for winding up are that;

• The company is unable to pay its debts; or that
• It is just and equitable for the company to be wound up.

This article will focus on a company that is unable to pay its debts.

When is a company unable to pay its debts?

There are two tests that a court will consider when making its decision as to whether to wind up a company. The first is referred to as the cash flow test and the second is the balance sheet test. The cash flow test is primarily a commercial approach whereby the court will consider whether the company is able to pay its debts as they fall due.

The second test is based upon the value of a company's assets in relation to its liabilities. This test has been broadened recently with a case decided in the Supreme Court that took into consideration a company's contingent and prospective liabilities. There is no longer a question as to whether a company has reached the point of 'no return' but instead the court will undertake an exercise which involves looking at the broader picture of the company's dealings now and in the future.

Both tests are considered by the court on a factual basis. However, a company will be presumed to be unable to pay its debts under the Insolvency Act if it has failed to satisfy payment as set out in a statutory demand or pursuant to a judgment debt. The grounds for issuing a statutory demand were set out in part one but, by way of reminder, a statutory demand can only be issued if there is an undisputed debt of £750 or more.

 Will a winding up petition stop a company from trading?

A common question is what effect a winding up petition will have on a company's ability to trade. The answer is clear, the company will have to stop trading. If it continues to trade its directors may face an action for wrongful trading which can see them found personally liable.

What other effect will the presentation of a winding up petition have?

The presentation of a winding up petition is a very serious matter for a company. The Insolvency Act provides that the following actions will be invalid after the commencement of the winding up unless there is a court order that says otherwise:

• Altering the status of company members;
• A transfer of the company's shareholding;
• Any disposition of company property.

Should a winding up order be made the period in which these transactions are void is deemed to be from the date of the presentation of the petition, not the date the order is made. This provision, therefore, has retrospective effect.

In practice a company that has a winding up petition presented against it should seek urgent legal advice and may need to apply to the court for a declaration that it can make payments or continue to trade. This is not an easy application but will give the directors some protection should a winding up order be made. Such applications are regularly made in relation to ongoing trading and payment of key expenses such as employee wages.

What happens once a winding up order is made by the court?

As soon as the winding up order is made the following will happen:-

• The Official Receiver will automatically become the liquidator of the company and take control of the company's assets;
•  The director's powers cease;
•  Any disposition of property is void;
•  There is a stay on commencing legal action without leave of the court;
•  The company's website and stationery must state that it is in compulsory liquidation;
•  All employees are automatically dismissed

Should I present a winding up petition?

If payment from a creditor is not forthcoming and the debt is more than £750 then a winding up petition is a possible option. It must be remembered that winding up is a 'class action' and, as such, the person who presents the petition does so on behalf of all of the company's creditors. It will not mean that your debt will get paid first (unless the company negotiates payment with you and the petition is withdrawn).

How much does it cost to wind up a company?

There are a number of costs associated with presenting a winding up including a deposit (currently £1,250) for the Official Receiver’s fees. This deposit will be returned to you if the winding up petition does not proceed. An undefended winding up petition will cost (including the Official Receiver’s deposit) approximately £2,500 to £3,000 plus VAT. If the company is wound up and has sufficient realisable assets the majority of the Petitioning Creditor's costs (but not the original debt) will be re paid as a priority.

Please feel free to contact us for help or guidance on dealing with difficult debtors or for further insolvency and restructuring assistance..