In the course of running a business, entrepreneurs will inevitably face periods where their finances are challenging. They may even find themselves grappling with the question: Can I stop a creditor from putting my company into liquidation? Let’s try to demystify this issue and understand the possible courses of action available.
Firstly, let’s clarify some key terms to aid understanding. Creditors are individuals or institutions to who a company owes money. A liquidator is a qualified, licensed insolvency practitioner appointed to wind up a company, sell its assets, and distribute the proceeds to creditors. Compulsory liquidation is a legal process initiated by creditors to wind up a company unable to pay its debts, while a winding-up petition is a formal document filed in court to start this process.
If you find your company on the receiving end of a winding-up petition, it can feel like an immediate sentence to compulsory liquidation, and it is something you should take extremely seriously. However, you may have options to halt this process.
Responding to the Winding-Up Petition
Once served with a winding-up petition, it’s absolutely vital to act quickly. You have seven days to respond before the petition is advertised in The Gazette, after which your company’s bank accounts are likely to be frozen. At that point, even if you might have viable options to deal with the petition it can become practically very difficult to actually continue trading because of a lack of access to cash.
Paying the debt in full, if possible, is the most straightforward way to stop the petition, but most companies who have received a petition don’t have this luxury. If you dispute the debt, you can apply to the court to have the petition dismissed, but this will require solid evidence that the debt is not due.
Negotiating with Creditors
Negotiating directly with the creditor who has issued the petition may be a viable option. If you can convince them that they will receive more if the company continues to trade rather than through liquidation, they may withdraw the petition.
A more formal way of doing this is by proposing a Company Voluntary Arrangement (CVA). If sufficient creditors agree to this it will allow the company to pay its debts over a fixed period (typically several years) and would generally also involve a portion of those debts being written off.
This agreement takes time to arrange and must be approved by creditors holding at least 75% of the company’s debt value, but it may be that you can get the petitioning creditor’s agreement to hold off any further action whilst a CVA proposal is drawn up and voted on by creditors.
Avoiding Compulsory Liquidation
Prevention is the best cure, and early identification of potential financial distress can help avoid compulsory liquidation. If your company has cash flow problems or is facing creditor pressure, it’s advisable to seek professional advice promptly. An insolvency practitioner can help you explore other solutions such as raising additional finance, negotiating with creditors or exploring restructuring options which would allow the business to continue to trade, such as CVA or a Restructuring Plan.
It’s vital to remember that directors of companies in financial distress must act in the best interests of creditors to avoid personal liability for company debts. When the company is insolvent or very close to it, this duty takes precedence over the directors’ obligation to shareholders.
In conclusion, the potential for a creditor to push a company into liquidation is a legitimate concern. However, knowing your rights, understanding the process, and taking proactive measures can help protect your company from compulsory liquidation. Acting swiftly and seeking professional advice at the first sign of financial distress is key to navigating these complex circumstances successfully.
Seeking Help from an Insolvency Practitioner
Seeking help from an Insolvency Practitioner (IP) when your company is experiencing financial difficulties is strongly advised. IPs are professionals licensed to advise on and carry out insolvency procedures, and their guidance can be invaluable during times of financial distress. But IPs are also skilled at supporting directors where there is serious financial pressure but the business still has a chance of survival. Here are some of the benefits an IP can bring:
Expert Knowledge: IPs possess a thorough understanding of the legal and financial landscape surrounding insolvency and liquidation. They know the intricacies of insolvency law, creditor rights, and the practical aspects of liquidation processes. Their expertise can help identify the best course of action tailored to your company’s unique situation.
Negotiation Skills: IPs can act as intermediaries between your company and its creditors. They’re experienced in conducting negotiations to reach favourable agreements, such as restructuring debts or organising Company Voluntary Arrangements (CVAs).
Compliance and Protection: Insolvency comes with legal obligations and potential risks for company directors. If you continue to trade while insolvent without taking adequate steps to repay creditors, you may be accused of wrongful trading, which can result in a director becoming personally liable for company debts. IPs can provide advice to ensure you’re compliant with laws and help protect you from such pitfalls.
Efficiency and Objectivity: IPs are obliged to act objectively, ensuring all parties involved in the insolvency process are treated fairly. Their involvement can expedite procedures, saving valuable time and resources and reducing the overall stress on the company and its directors.
Strategic Planning: IPs can assist with strategic decisions, whether that’s developing a rescue plan for the business or guiding you through an orderly winding up. They can help directors assess the viability of the business and devise an effective plan to maximize returns to creditors, thereby safeguarding the directors’ legal responsibilities.
In essence, the expertise of an Insolvency Practitioner can provide crucial guidance during turbulent times. Not only can they help navigate the complexity of the winding-up process and possible liquidation, but they can also be instrumental in helping explore alternative solutions that could save the company or, at the very least, help the directors avoid personal liability.
Find out more about why you need an Insolvency Practioner here.
