A creditor has pursued the debts due to it for a significant period and has exhausted all other avenues to recover. Often deals to repay will have been agreed but the debtor company has not stuck to the deal, has demonstrated intractability or simply does not want to communicate with the creditor. In this situation the creditor will instruct a solicitor or debt collector to collect the debt, if all avenues of collection subsequently fail then the agent can proceed with an action to wind the company up.

The costs of this action are not insubstantial and a creditor has to decide whether the debtor is likely to pay up. A debt of over £750 must be undisputed and the creditor must have notified the debtor of its intent to collect the debt. Often this will involve the issuing of a statutory demand first. If the debtor fails to pay the statutory demand in 21 days and does not dispute the debt, then the creditor may issue a winding up petition.

From solicitor to solicitor the costs vary but a typical cost of the action will be £250-£500 for a statutory demand, £1,000-£2,000 for a winding up petition (includes court costs). Despite this, for larger debts it is a very effective way of collecting money when the creditor believes that there is sufficient resource to pay it. Many larger companies use established debt collection law firms to collect their debts this way.

The application for a petition will be granted where it can be proven to the court’s satisfaction that the debt is undisputed, attempts to recover have been undertaken and the debtor is not compliant. A petition will be issued and court hearing date granted, usually the date is well in the future because of court pressures. Once the petition is correctly served upon the company it has a period to pay the debt or to defend the action. This is costly as the action is usually in the High Court. This requires a barrister to attend and the costs of such defence are high. If the case is found the company is wound up by the court.

Substitution of Service.

Even if the debt is paid (always with full costs), the fact that a petition is issued means that a winding up hearing (in the High Court) MUST be held. Between the date of the payment and the hearing it is possible (and often happens) that another creditor learns of the petition and “substitutes” their debt for the settled debt. Thus, they piggy back the action in order to get ahead of other creditors and get paid.

15 days, (or sometimes more) before the hearing the petition is “advertised” in the London Gazette. All high street banks and lenders monitor this very carefully because if a customer is involved in such an action they MUST freeze the bank account immediately – thus stopping any trading. The purpose of this is to stop assets being sold or other transactions that may worsen the creditors position.

This mechanism is used most by the Inland Revenue and HM Customs and Excise. Over 50% of all petitions are issued by the crown agencies as the revenue and the VAT are “involuntary” creditors. The action of trading and employing people means that the debt to the crown ticks up. If a company tries to make arrangements to repay outstanding PAYE and/or VAT and still fails to make payments the crown debt will be rising. For these reasons they decide to wind the company up. This way, either the company will pay, enter a CVA or Administration or simply cease trading.

If the Crown winds up the company remember that the liquidator is court appointed and will investigate very carefully the actions of the officers of the company. If it can be proved that these individuals traded wrongfully, took credit without reasonable prospect of repaying the debts, failed to submit accounts or a number of other offences then it is possible they will face action.

Company Director Disqualification.

Remember that the DTI or liquidator can press for the Directors to be disqualified and, in some cases, fined.

Compulsory Liquidation should always be the last option and generally, should be avoided at all reasonable cost.

For further information for company directors see Directors Responsibilies

Take advice, call our advisers on 0800 881 8879 (FREEPHONE) or email us at: debtadvice@24-7finance.com . This is a confidential and free service.



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