Increasing business debt will cause more winding up petitions

As the number of companies in financial trouble continues its expected increase into 2010 it is to be expected that debt collection strategies such as winding up petitions will increase as well.

It looks increasingly likely that the UK economy will come out of recession during the final quarter of 2009. However, according to insolvency firm Begbies Traynor, 134000 UK companies are showing signs of being in financial trouble and they believe that business insolvencies will continue to rise for up to two years after the economy stops shrinking.

Credit information provider Creditsafe have a recent survey that backs up this idea. The survey has suggested that the number of companies who are suffering with late payments and bad debts are on the increase. 91% of the businesses surveyed saw an increase in bad debts during the past 12 months. Nearly 10% had bad debts equal to 20% of their annual profits.

Hand in hand with the rise in the number of companies in financial difficulty, will be the increasing number of businesses trying to recover their bad debts. Different strategies to collect outstanding balances will be used, however it is likely that the issuing of winding up petitions will form a large part of these.

Over the past year to eighteen months, the use of winding up petitions as a debt collection tool has become much more prevalent. If a winding up order is issued against a company, this has very serious implications for the business. Perhaps the most serious of these is the fact that the company's bank account will be frozen making continued trade extremely difficult.

Many creditors are fully aware of the impact that issuing a winding up petition will have on a business. They therefore expect that if they pursue this action, the debt they are collecting will be paid swiftly. With such a powerful lever at their disposal, it is inevitable that the number of winding up petitions issued will be on the increase.

Before considering a winding up petition the creditor must demonstrate that they have exhausted all other options. If they are unable to show that such efforts have been made, it is likely that the court will not grant their application for a winding up petition. The cost of issuing a petition could be up to GBP2500 (including the cost of the statutory demand). As such, this action will not to be undertaken lightly.

It is important that companies be aware that if they do face a winding up petition they must take swift action.

If your business does receive a statutory demand for payment or a winding up petition you must get advice from an insolvency expert as soon as possible. Such an action can be successfully defended if it has been raised in error. Alternatively, a repayment plan can be negotiated with the creditor or a business rescue solution such as a Company Voluntary Arrangement or Pre-Pack Administration introduced. The most important message is that you must not ignore this type of action. Doing nothing could very easily lead to your company being wound up.