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Why a Winding Up Petition is bad news for your company

With bad debts on the increase, companies are looking at ways to put pressure on in order to get the debts paid. One method on the increase because of this is the use of Winding Up Petitions. They can have big consequences for a company and are therefore used to apply pressure.

Why a Winding Up Petition is bad news for your company

Winding up petitions are in the increase, particularly as a method of trying to help collect business debt. This is because of the pressure they put on the debtor due to the serious consequences they can cause. If you receive a winding up petition it is vital to act quickly or risk losing your business.

The Winding up process is used to force the closure of a business where there is outstanding unpaid debt. The creditor must first issue a statutory demand for the payment of their debt. If the problem is not resolved within 21 days, a petition for the winding up or closure of the business can be issued.

If the court grants the winding up petition then the company in question will be liquidated. The directors of the company can of course challenge the petition. However, once a winding petition is issued, there will be serious consequences for the business even if the debt owed is subsequently paid or successfully challenged.

Bank account frozen

After seven days the London Gazette will publish details of the winding up petition. The company's bank will be made aware of the petition and will normally freeze the business bank account. This means that cash cannot be paid into the account and payments cannot be made.

In addition to its bank accounts being frozen, the company is legally prevented from selling any assets or property. As such it is extremely difficult for the company to continue to trade.

If your company receives a winding up petition, there are certain actions that you can take:

Validation Order

It may be possible to unfreeze the company bank account to make specific payments, for example staff wages. However, this can only be achieved with the specific agreement of the court. If the court agrees that the transaction can take place, it will issue a validation order to this effect. The cost of applying for a validation order will have to be borne by the company directors.

Company Rescue

If you quickly go down the route of a legal business rescue process such as Administration or a Company Voluntary Arrangement this will take precedent over the other court action. As such a winding up petition would automatically be overturned.

If your business is in receipt of a winding up petition, the business rescue solution you will normally consider is a company voluntary arrangement. This solution will enable the directors to retain control of the management of the business unlike administration where the directors will lose control.

Unfortunately, the option of pre-pack administration or phoenixing is not available as this requires the sale of company assets and this transaction cannot be undertaken once a winding up petition has been issued without a validation order from the court.

Given the serious implications of receiving a winding up petition, the best thing is to avoid this situation all together. However, if one of your creditors issues your company with a statutory demand or you are actually in receipt of a winding up petition, it is very important that you take specialist advice as soon as possible.

There are actions you can take to prevent your business being wound up. HoweverFree Web Content, these options will diminish unless you act quickly.

Article Tags: Bank Account, Validation Order

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Why a Winding Up Petition is bad news for your company

If you have a Winding Up Petition, talk to us about the best solution for your situation

Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK. Cooper Matthews specialise in Business Recovery Services Advice providing practical insolvency advice for businesses with financial problems and to Directors with Personal Financial troubles. They have significant experience in working with small to medium sized businesses.

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