Stopping a winding-up petition is crucial as it can thrust a company into involuntary liquidation, activating Section 127 of the Insolvency Act 1986, which restricts directors from making payments without court approval.
This situation can seriously jeopardize the company’s viability, affecting employee job security and salary payments.
Furthermore, the process of issuing a winding-up petition is costly, with creditors resorting to it as a last resort due to frustration over unresponsiveness to debt repayment requests.
Recognizing that winding-up petitions rarely appear out of nowhere, taking swift action and seeking expert advice becomes imperative when a company’s relationship with a creditor deteriorates, or when such a petition looms on the horizon
5 Effective Ways to Stop a Winding Up Petition
When faced with a winding up petition or the looming possibility of its issuance, swift and decisive measures become imperative. Explore five effective strategies to address and handle the situation with diligence and prudence.
1. Repay the money owed
Repaying the money owed becomes a pressing priority when confronted with a Winding Up Petition (WUP). In such challenging circumstances, Invoice Finance emerges as a viable option to promptly settle outstanding debts.
By leveraging Invoice Finance, businesses can access immediate funds by selling their unpaid invoices to a financial institution, effectively bridging the cash flow gap and enabling them to extinguish the WUP.
This financing solution not only alleviates the immediate threat but also empowers businesses to regain financial stability and maintain a healthy credit standing for future operations.
2. Agree a Time to Pay Plan with the Creditor
When faced with the challenge of repaying the money owed and dealing with the threat of a Winding Up Petition, businesses can explore the option of establishing a Company Voluntary Arrangement (CVA). A CVA provides struggling or insolvent companies with a statutory moratorium on their debts from creditors, granting the directors the opportunity to retain operational control while working to improve the company’s financial situation.
Through a realistic assessment of cash flow and future viability, an appointed insolvency practitioner crafts a feasible payment plan for all creditors, not just those posing a winding up petition.
To proceed with a CVA, a majority of creditors must approve the arrangement, after which the insolvency practitioner collects payments from the company and distributes them according to the agreed-upon plan. The CVA enables the company to continue trading, safeguarding its market presence and preserving jobs.
For debts owed to HMRC, businesses can negotiate affordable monthly instalments through the established time to pay arrangement, tailored to their unique financial circumstances, as there is no one-size-fits-all solution.
This approach offers businesses a structured and collaborative way to navigate financial difficulties and work towards a sustainable future.
3. Dispute a Winding Up Petition
In the aftermath of a winding up petition being issued against a company, a crucial seven-day timeframe arises during which the company can challenge the petition by seeking an injunction or a validation order from the court.
For a validation order, the company must furnish the court with relevant information concerning the payments they plan to make to settle the debt. A supporting witness statement explaining the advantages to the creditors if the payment plan is authorized by the court should accompany this application.
Generally, the courts are inclined to grant a validation order to solvent and viable companies, which demonstrates a responsible approach to settling the debt. However, if the company is insolvent, the application for a validation order is likely to be unsuccessful.
Alternatively, a company director can contest the winding up petition by applying for a court injunction, provided they can convincingly demonstrate that the debt is genuinely in dispute. In this scenario, there is no need to prove the company’s solvency, and if the dispute is substantiated, it can effectively halt the winding up process.
Both the validation order and the court injunction offer companies a chance to present their cases and resolve the issue swiftly, depending on their financial circumstances and the legitimacy of the debt dispute.
4. Enter Administration
Company directors facing financial difficulties can opt for the administration process as a means of seeking legal protection from creditors who are pursuing the company. This process grants a statutory moratorium, offering a breathing space to reorganize the business and pursue either its rescue or, if necessary, a better return to creditors in case of insolvency.
Pre-pack administration is another type of administration process wherein an insolvent company is placed under administration, and its assets or the entire company are sold if deemed viable. This formal insolvency procedure requires the appointment of a licensed Insolvency Practitioner (IP). If the IP determines that the company is saleable, the sale must be arranged before the company enters administration.
The advantages of pre-pack administration are significant. It can potentially save the business from closure, mitigate the impact of insolvency, and importantly, nullify the winding up petition, providing a more orderly and controlled approach to the company’s financial challenges. This process allows for a smoother transition and better prospects of recovery for the company and its stakeholders.
5. Creditors Voluntary Liquidation
Creditors Voluntary Liquidation (CVL) is an insolvency process initiated by a company’s directors when they recognize that the business is no longer viable and cannot meet its financial obligations. In a CVL, the directors, after seeking professional advice from a licensed Insolvency Practitioner (IP), make the decision to liquidate the company.
Unlike compulsory liquidation, which is forced upon the company by a court order following a Winding Up Petition, CVL is a voluntary and proactive choice. During the CVL process, the company’s assets are sold, and the proceeds are distributed among its creditors. It’s worth noting that in some cases, the company may need to obtain the permission of the petitioning creditors who initiated the winding up petition before proceeding with the CVL.
This step ensures a transparent and cooperative approach, facilitating the smooth and orderly winding down of the company’s affairs and the fair treatment of all creditors involved.
What Should You Do When a Winding Up Order Has Been Issued?
After the successful issuance of a winding up petition and the court’s agreement with the creditor’s position and claims, a winding up order is issued, signifying a critical stage that demands immediate action.
Following the petition date, there is a seven-day waiting period, after which the winding up petition is publicly advertised in The Gazette. At this juncture, banks typically freeze the company’s accounts, effectively hindering any further trading activities.
The company still has the same five options available to negotiate with the creditor, as mentioned earlier. However, by the time the winding up order is issued, previous negotiation attempts or payment plans may have already proven unsuccessful, reducing the range of available options.
This situation heightens the urgency for the company to take decisive and strategic measures to address the debt and financial challenges before facing more severe consequences associated with the winding up process.
Frequently Asked Question
How do you stop a winding up petition?
To stop a winding up petition, prompt action is crucial. Companies can explore several options, such as negotiating with the creditor for a mutual repayment arrangement, seeking protection through a Company Voluntary Arrangement, or applying for a court injunction if the debt is genuinely under dispute. Additionally, the administration process or pre-pack administration may provide legal protection and a chance to reorganize the business. It is essential to act swiftly before the winding up order is issued and the situation becomes more complex.
Can you defend a winding up petition?
Yes, you can defend a winding up petition. When facing a winding up petition, it's crucial to take immediate action to protect your company's interests. You can defend the petition by seeking professional advice from an Insolvency Practitioner or a legal expert. Several strategies can be employed, including negotiating with the petitioning creditor to reach a settlement, disputing the debt if it's genuinely under question, or exploring options like Company Voluntary Arrangement or administration.
Read more:
- How to avoiding going into administration
- What is a pre pack administration?
- Client gone bust – What to do next?
Conclusion
In conclusion, when faced with the challenging prospect of a winding up petition, it is imperative to act swiftly and seek legal advice at the earliest stage possible.
Taking proactive measures can significantly improve the chances of managing creditor demands effectively. Engaging the expertise of an Insolvency Practitioner or a legal professional can provide invaluable guidance and insights tailored to the specific circumstances of the company.
By taking decisive action and seeking expert advice promptly, businesses can navigate the complexities of a winding up petition and work towards preserving their financial stability and future prospects.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.