Winding up an insolvent unregistered company

Similar to limited companies, unregistered businesses such as sole traders and partnerships, can be served with a winding up petition by their unpaid creditors. Mike Smith explains.

The most severe action that an unpaid creditor can take against a limited company that refuses to pay an undisputed debt is to issue a winding up petition.

If the debt is not settled, a winding up hearing will take place and the court will decide whether a winding up order should be made to liquidate the company.

Although limited companies are the most common recipients of a winding up petition, this form of action can also be used to liquidate unregistered businesses, albeit with some key changes in the process.

What is an unregistered company?

In simple terms, an unregistered company is a business that is not covered under the provisions of the Companies Act 2006. Unregistered companies can be sole traders, where there is a single owner, or partnerships, where two or more people agree to operate the business for profit.

The key difference between registered and unregistered businesses is that registered companies have their own legal identity, separate to that of the company directors, while unregistered companies are simply an extension of the business owners. The members (shareholders) of a registered company also benefit from limited liability, which means that they are only responsible for company debts to the extent of the nominal value of their shares. The owners of unregistered companies do not receive this same level of protection, which means their personal assets can be at risk.   

When can an unregistered company be wound up?

There are three circumstances in which a solvent or insolvent unregistered company can be subject to the compulsory winding up procedure, and these include:

  • Where the company is dissolved or has ceased to carry on business, or is carrying on business only for the purposes of winding up its affairs.
  • Where the company is unable to pay its debts.
  • Where the court is of the opinion that it is just and equitable that the company should be wound up.

Winding up an insolvent unregistered company

In the case of an unregistered company that can’t pay its debts, the provisions of insolvency legislation apply to the winding up of the company as they would to a registered company, albeit with a few key exceptions. The most notable exception is the extent to which the owners and partners of a business are responsible for the company’s debts.

In the case of a compulsory liquidation of a registered company, only if the directors have been involved in wrongful or fraudulent trading do they risk being made personally liable for a proportion of the company’s debt. If there is no fault on the part of the directors, the company will be liquidated and the assets will be sold for the benefit of the company’s creditors. This could mean that the creditors receive a return that is only a few pence for every pound of debt.

Sole traders and unregistered partnerships do not receive the same level of protection. In this case, once a winding up order has been made, business owners and partners have to personally contribute to the debts of their business if the company assets are not sufficient to cover the company’s debts.  

The role of ‘contributories’ in unregistered liquidations

If the assets of an unregistered business are insufficient to meet the company’s debts, contributories, who are individuals liable to contribute to the assets of the company in liquidation, will be called on to meet those debts. They will have to contribute to:

  • the debts and liabilities of the company
  • any sum for adjustment of rights of members among themselves
  • the costs, charges and expenses of the winding up procedure

Who are the contributories?

This depends on the type of business structure, the amount of debt owing and the decision the creditor makes when issuing the winding up petition.

In the case of a partnership, there are three different courses of action the petitioning creditor can take. They can:

  • Petition to wind up the partnership, but not take any action against individual partners.
  • Petition to wind up the partnership and file a bankruptcy petition against one or more of the partners.
  • Issue an individual bankruptcy petition against one or more of the partners, without petitioning to wind up the partnership itself.

If the creditor chooses to issue a winding up petition against the partnership, and files a bankruptcy petition against one or more of the partners, the court will consider the winding up order before moving on to bankruptcy petitions. A creditor can only issue a bankruptcy petition against an individual partner if they are owed £5,000 or more.

In the case of a sole trader, action can also be taken against the business, the business owner personally, or the business and the business owner. Again, creditors can only present a bankruptcy petition against the business owner personally if they are owed £5,000 or more.

Filing bankruptcy petitions

If a business owner or partner can’t pay their company’s debts in full, a creditor can apply to the court using a bankruptcy petition. If the court decides to make a bankruptcy order, the money recouped from the sale of the personal assets of the business owner or partner will be distributed to the business’s creditors in proportion to the level of each debt. This means the petitioning creditor may not receive everything that they are owed.

A bankruptcy order will be made by the court if:

  • The creditor is owed £5,000 or more and a statutory demand has been served for the money owed, which has not been paid.
  • A settlement is not agreed within 21 days and the debtor has not applied to have the statutory demand set aside.  

There are costs associated with issuing a bankruptcy petition, and a statutory demand will need to be served on the business owner or partner first. As a creditor, it is important to take these costs into account before deciding whether to petition the individual, the business or both.

About the author

Mike Smith is a director at Company Debt, a member of the Turnaround Management Association