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The consequences of receiving a winding up petition

Are you a director of a company that is struggling to meet its commitments to its creditors due to a slump in sales or a sudden unexpected expense or bad debt?  Initially you may be able to get by using the company’s reserves, but what happens when these run out?  You may have to rob Peter to pay Paul, but this can only work for so long.  You may be in a position where you can arrange for some additional funding for the company to help cashflow, but again this may only be a temporary solution.

If you are not able to turn the company around by the time the cash runs out, it will result in a position where the creditors will start applying pressure.  You will probably not feel inclined to talk to them as you have no money or information to give, so you ignore their calls, letters and threats.  I recommend, even if the company cannot pay the creditor, that you keep in contact with them.  If you do not do so, this could lead to a statutory demand being issued against the company if the creditor is owed more than £750.  If the statutory demand is unpaid after 21 days, then the creditor can issue a winding up petition.  Even if all your hard work and efforts are beginning to pay off and the company was starting to turn the corner, being issued with a winding up petition can have a detrimental impact on the company.

If the company is able to pay the petitioning creditor’s debt, it will also be expected to discharge the petition costs.  Be mindful that other creditors can support the petition once it is issued and therefore you may be forced to pay other creditors at that point too.

If you receive a winding up petition and the company is not in a position to pay the debt within seven days, the petition will be advertised in The London Gazette.  This means it is now public record and at that point the company’s bank account will be frozen irrespective of whether it is in credit or overdrawn.  Suppliers are likely to detect that the company is in financial difficulties, if they haven’t realised already, and they will place a stop on your accounts.  Without access to a bank account and suppliers demanding cash up front before they supply goods or services, the company will effectively have to cease trading.

Once a winding up petition is issued, it will be heard by the court and if the petition is not defended, the court will issue a winding up order.  This is the start of the compulsory liquidation process. Your powers as a director will automatically cease and you lose control of the business.  Your conduct and actions as a director in the period leading up to liquidation will be examined to identify any wrong doings or failures of your duties.  It is important to remember that once you become aware that the company is in financial difficulties, you do not do anything to the detriment of creditors.

If the company does receive a statutory demand or winding up petition, it is imperative to seek professional advice as early as possible.  There are options available to you if you seek and act early.  It may be that a company voluntary arrangement or a creditors’ voluntary liquidation would result in a better outcome for all parties compared to a compulsory liquidation.

If you require any further information, please contact us.

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