Traditionally, if any creditor of a business owed more than £750 was struggling to collect its debt, that creditor could decide to petition for the winding up of the company. The motive for this action would not necessarily have been to receive payment of the debt. Given that the company would subsequently be liquidated, the expectation would have been that there would have been many creditors and few company assets. Rather, the action was intended to prevent the struggling business from continuing to trade and thus putting other potential suppliers at risk.

More recently, creditors have started to use winding up petitions specifically as debt collection tools. Rather than issuing a county court judgement which could then be ignored, creditors are choosing to issue the winding up petition because of the immediate pressure that this puts on the company to pay the outstanding debt.

Once a winding up petition is issued, it is advertised in the London Gazette. This advertisement will be identified by the company’s bank which will normally cause the bank to suspend the company’s banking facilities until the petition is either granted or withdrawn. Clearly, if banking facilities are suspended, this will cause serious disruption and will hinder the company’s ability to trade. If the winding up petition is successful and the winding up of the company is ordered, a liquidator will be appointed and it is likely that the company will be closed.

Given these serious implications, as a company director, it is very important for you to understand your options if a winding up petition is received. There are a number of actions that you can consider in these circumstances:

1. If you believe the creditor’s claim is genuine, you could make every effort to pay the petitioning creditor so that the winding up petition is lifted. Of course, this may very well be to the further detriment of the business as cash will have to be diverted from other places if indeed any is available at all.
2. If you believe that the petition is unjust, you can contest the action. However, this will involve hiring a solicitor with associated costs. In addition, the company’s bank will have to be involved to ensure that accounts are not frozen. Unfortunately, there is no guarantee that the bank will agree to this.
3. You and owners of the business could decide that the company is not worth saving and agree that it should be wound up. If this is the case, it would be sensible for you to instigate a creditors voluntary liquidation yourself thus giving you more control of who is appointed liquidator.
4. If you and/or the shareholders of the company believe that the business is worth saving you could consider undertaking a pre pack liquidation (commonly known as a company phoenix). A new company could be set up to purchase the assets of the old business and continue to trade leaving the old business to be wound up.

Given that an increasing number of businesses are struggling in the current economic climate, far more creditor’s accounts are falling into arrears. Subsequently, the number of winding up petitions issued is on the increase. If you know that your business is about to receive a winding up petition or such a petition is received out of the blue, it is vital that you take advice from a corporate insolvency specialist as soon as possible.

As highlighted above, there are a number of options that you could consider. However, the implications of these are serious and far reaching and must be properly understood.

Derek is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK

Visit http://coopermatthews.com/company-liquidation.html for more information