Are you winding me up?

In a difficult economic climate, businesses are turning to winding-up petitions as a way of recovering their debts. Nat Young, Partner in Insolvency and Dispute Resolution, explains why.

What is a winding-up petition?

Winding-up petitions are used to ask the court to wind up a company or put it into liquidation. Usually they are presented by creditors on the basis the company owes them money.

Can winding-up petitions be used to recover debts?

Technically, as insolvency judges frequently tell lawyers, winding-up is a class remedy for the benefit of all the company’s creditors, not a debt recovery tool. However, bringing winding-up proceedings can be a better way to enforce debts than court proceedings.

Court proceedings to enforce debts are notoriously slow, and end with a judgment that you may or may not be able to enforce. Insolvency proceedings apply much stronger pressure at a much earlier stage. A company either has to pay any undisputed debt, or it will cease to exist.

When are winding-up petitions most effective?

In simple terms, following a winding-up process works best when a company can pay, but chooses not to pay.

Some companies deliberately avoid paying their debts. Others have access to some money, but only enough to pay their most pressing creditors.  If faced with the prospect of being shut down, they will find a way to pay, or at least make an offer.

Some companies simply cannot pay, and cannot get funds from elsewhere. Put under pressure, they will go into liquidation.  The unsecured creditors will usually get little and often get nothing. However, court proceedings are also of little use in that scenario.

Some companies are just disorganised and let their debts go overdue. While a winding-up petition may be effective, it could also be overkill compared to court proceedings.

Can petitions be used against sole traders?

Winding-up petitions are only for use against limited companies and LLPs. However, bankruptcy petitions can be used against individuals, including sole traders. The process and rules are different, but the overall advantages and disadvantages are similar.

What size of debt is suitable for a winding-up petition?

Winding-up petitions only require a minimum debt of £750. Unlike court proceedings, the petition costs the same whatever the size of the debt, so for small debts where there is a risk the debtor cannot pay, the petition costs will be disproportionate. However, the debtor will have to pay the creditor’s costs to get rid of a properly presented petition, so the main question is whether the debtor can pay rather than the size of the debt.

Can you use a winding-up petition for disputed debts?

If there is a genuine dispute, presenting a winding-up petition is not a good idea. The debtor can apply to court for an injunction to prevent you proceeding, and will want their costs paid too. However, where a debtor is trying to run a spurious defence, winding-up proceedings can be quite attractive. The injunction process means the court decides whether there is a genuine dispute much more quickly than it would in court proceedings, which will often take several months to get to the same stage.

Here to help

If your business is owed money, it is important to consider the most appropriate course of action before costs escalate. Nat Young can advise on the options available, the risks involved and whether insolvency proceedings could help achieve a swift and commercially sensible outcome. For advice, please contact Nat Young, Partner in Insolvency and Dispute Resolution.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.

This article was originally written for the Inspire Magazine, issue 76.

NLA article not to be reproduced.