Andy Wood outlines the options available to businesses in a precarious financial position.

Imagine the scenario... you are the owner-manager of a limited company that has been struggling to meet its commitments following a slump in sales. Initially, you were robbing Peter to pay Paul, but eventually, even Peter had no money. There seemed little point in speaking to your creditors, as you simply couldn't pay them. So you ignored their letters and threats.

One of the creditors was particularly persistent, because they were owed several thousands of pounds, and had issued a statutory demand – which you also ignored. As a result, the creditor obtained judgement against the company.

Just when you thought that things were improving, having secured a new contract and with sales picking up, the company was served with a winding up petition. This is perhaps the worst thing that can happen to a limited company. In the case of limited companies, a creditor must be owed £750 or more to issue a winding up petition.

Once a petition has been issued, a date is set for the court to hear the creditor’s petition. If it is successful (or if the petition is ignored), this will result in a winding up order being granted against the company.This is the start of the compulsory liquidation process.

What happens if I don’t pay the petitioning creditor?

If you can’t (or don’t) pay the petitioning creditor within seven days, the petition will be advertised in The Gazette. At this point, all bank accounts are frozen, irrespective of whether they are in credit or overdrawn. This will effectively cause most businesses to cease trading.

To continue trading, permission is required to reactivate the bank account or dispose of assets, which must be sought by the court. This process involves using a solicitor with significant associated costs.The request should itemise crucial items – wages, essential suppliers etc – and be backed up with reasons showing that this will not be to the detriment of creditors. If agreed, the court will issue a validation order to allow only the agreed payments to be made.

So a validation order ‘un-freezes’ the bank account for specified transactions, but that doesn’t rescue the business, and the hearing date is looming. Word soon spreads among creditors who stop further credit, and the company’s options are now very limited. It is no longer possible to borrow against company assets, and any major asset disposals will be scrutinised and could be voided.

If the underlying business is sound, urgent steps need to be taken to save it. As a director, you must not do anything that would be to the detriment of creditors.

Offering to settle the petitioning creditor’s debt

This may sound like a good idea, but you would be expected to also cover the petitioner’s costs.

Additionally, when a petition is issued, other creditors can attach to it. So having paid the petitioning creditor, you may face having to pay other creditors, too. For this reason, it makes sense to request the petitioning creditor’s solicitor to write to the court to withdraw the petition, which can take a couple of weeks, and creditors could still attach in the meantime.

Any chance of saving the business at this point it is now a matter of the greatest urgency, as things can very quickly spiral out of control.

Administration order

An administration order is a powerful tool that gives the company protection against both ongoing and new legal actions. It buys time for the administrator to consider a way forward, which could include attempts to attract new investors or lenders, or perhaps arrange a company voluntary arrangement, or maybe even sell the entity as a going concern.

If steps are not taken to try to rescue the business, a winding up order will be issued and the process of compulsory liquidation will commence. At this stage, the directors’ executive powers automatically pass over to the Official Receiver (OR) or the appointed liquidator, and the directors lose control of the business.

In this scenario, all employment contracts automatically terminate, the assets are sold and, by this stage, there is no opportunity to save the core business.The actions and conduct of the directors in the period up to liquidation will be examined by the OR (or the appointed liquidator) to identify any wrongdoings or failures in their duties.

Individual debtors

So far, we have referred only to limited companies, but a parallel situation exists for individuals. If an individual owes a minimum of £5,000 to a creditor, then the creditor could issue a bankruptcy petition, if all else has failed. If ignored, the end result could be bankruptcy.

The best advice to either an individual or a company director who has received a petition is to seek urgent advice. No two situations are the identical, but the sooner advice is sought, the more options are generally available.

About the author

Andy Wood is associate director at Wilson Field. Former R3 Yorkshire and Humberside regional chairman and committee member, Andy is a licensed insolvency practitioner who has a wealth of experience in advising companies from small owner-managed businesses to large corporations with multi-million pound turnovers with a focus on relationships, trust and empathy.