When a struggling company is unable to pay its debts as they fall due, there are statutory measures available to creditors to attempt to recoup funds due to them. These often come in the form of a:
A brief overview of CCJs
Obtaining a CCJ is an effective way for a creditor to have their debt recognised by the Court. Unless a CCJ is appropriately appealed, the creditor can then seek to enforce it and instruct a High Court Enforcement Officer (also referred to as a bailiff) to attend the company premises and attempt to seize assets in order to discharge the debt.
Having a High Court Enforcement Officer attend the company premises can be a very unpleasant experience for the directors and employees alike and can severely hamper the company’s ability to trade and staff morale. A CCJ will also adversely affect a company’s credit rating.
Whilst the issuing of a CCJ is not as severe as a Winding Up Petition (as referred to a little later) we would strongly recommend that you speak to us upon receipt of a CCJ to consider your options.
In addition to, or instead of a CCJ, creditors may decide to issue a ‘Statutory Demand’ against the company. Producing a Statutory Demand is simple and it provides the creditor with a short period of time to either pay or dispute it. A Statutory Demand is a way to prove that a company cannot pay its liabilities as they fall due (i.e. insolvent).
You can apply to Court to have a statutory demand set aside within 18 days of the demand being served. If the debt is not satisfied within 21 days, the creditor may petition for the company to be wound up. It is therefore important that a Statutory Demand is not ignored.
A point worth noting – a Statutory Demand should not be used for disputed debts. It should also not be used as a debt recovery procedure. Doing so will be an abuse of the process. Instead, a Statutory Demand should only be used as a clear sign of intent to wind up the company if the debt is not paid.
What is a Winding Up Petition?
A Winding Up Petition is an application filed at Court by a creditor for the debtor company to be wound up. A petition is often served following the expiration of the time period specified within a Statutory Demand. Any creditor owed in excess of £750 may petition for the winding up of a company.
Upon issuing the petition, the Court will set a hearing date to consider the winding up. Notice will be served upon the debtor company and the hearing will be publicly advertised in the London Gazette at least 7 days prior to the hearing. At the hearing the Judge will either:
Issue a Winding Up Order – in which case the company will be placed into compulsory liquidation administered by the Official Receiver;
Adjourn the hearing – usually with strict conditions to be met; or
Dismiss the petition – usually only happens when the debt has since been settled or it can be otherwise demonstrated that the petition ought not to have been issued in the first place.
Practical Implications of a Petition being issued
Receiving a Winding Up Petition can have drastic implications for a company, including:
The company’s bank account being frozen.
Other creditors ‘piggy backing’ on the petition – making it harder to get the petition withdrawn or dismissed.
Contractual terminations – some formal contracts, such as leases, may terminate upon the issuing of a petition.
Reputational damage; etc.
Historically, when a Winding Up Petition was issued the only parties that knew about it was the Court, the creditor and the debtor company. With petitions not having to be advertised until 7 days prior to the hearing, it provided sufficient time in many instances for the debt to be settled or some other agreement otherwise entered into with the creditor for the petition to be withdrawn.
In recent times, it has been more accessible for the professional industry to learn of unadvertised Petitions. The data for petitions is obtained from the Court’s centralised system and is now more commonly made available to insolvency practitioners, solicitors, data software providers, banks etc. It is for this reason that many companies now find their bank account has been frozen when the Winding Up Petition is not (strictly speaking) public knowledge.
Why do the Bank Accounts get frozen?
Upon being notified of a Winding Up Petition, the bank will freeze all facilities in order to protect the funds and act in the best interest of creditors. Why? Insolvency legislation dictates that when a winding up order is granted against a company, each transaction that occurred between the date of the petition and the winding up order is void. The freezing of the bank account is a protective measure to mitigate any such void dispositions.
As expected, most companies can simply not function without access to funds within their bank account or the use of other facilities afforded to them by the banks. If the company believes that a winding up order can be avoided and the company can survive, it must apply to Court for a Validation Order for the bank account to be unfrozen. This can be a costly process.
Continuing to trade following a petition being issued
Despite receiving a Petition, most companies still carry-on trading if they can and in the hope that something can be agreed with the petitioning creditor to ensure the survival of the business.
Notwithstanding this, it is critical that a company director acknowledges when a company is insolvent. If a company is insolvent, a director’s overriding duty of care switches from the company’s shareholders to its creditors. If a company is genuinely insolvent, it should cease to trade immediately.
What URGENT action should directors take?
As demonstrated earlier, the issuing of a Winding Up Petition should not be taken lightly. Even if a company is confident that an agreement can be reached with the petitioning creditor, it could be too late.
If you have received a Petition or have even been threatened with one, you must seek advice immediately. This should either be from a licensed insolvency practice, like Ballard Business Recovery, and/or a solicitor.
How can Ballard Business Recovery help?
When we are approached by any company in financial distress our initial advice surrounds the options available to rescue the business.
If there is a genuine expectation that steps can be taken the appease the petitioning creditor and the company is not in fact insolvent, we can assist you in making sure you have the appropriate legal representation to defend the petition.
Where the position is perhaps not so clear, and the company is insolvent, we can explore what rescue procedures exist that will not only protect the interests of creditors but also protect the company from any further legal actions being brought by creditors. If such procedures are not appropriate based on the company’s circumstances, we can also assist you in placing your company into a creditor’s voluntary liquidation as opposed to a compulsory winding up and advise you of the benefits of this.
If the winding up hearing is fast approaching, please call us immediately. At the very least we can work with you to obtain an adjournment from the Court to allow sufficient time to implement an appropriate strategy. We are here to help.