Issued a winding up petition - what next?

[Matt63]

My company was owed a six figure sum under a contract. Shareholders of the debtor are wealthy individuals but payment was not made, so was advised by solicitors to issue a statutory demand. This did not receive a sensible response, but in the meantime the debtor acquired another business, so was advised to issue a winding-up petition. Still no sensible response. Discovered the debtor was still engaging in new contracts with new suppliers. Was advised to advertise the winding-up petition in the London Gazette. This has all been done, the court date is very soon but the debtor is continuing to trade. What happens next? I simply cannot imagine that they do want their business to be wound up, so what can they be planning?

 

[mhall]

I would guess they are in the process of moving customers to the new company before the one you are chasing gets wound up. Chances are you can kiss goodbye to any money.

Winding up orders will cost you money. They may well be grateful to you as they do not have to pay for it themselves. I would also guess your solicitor is a happy bunny

 

[Matt63]

Do you have any suggestions as to how my company can get paid? We know they have the money and the company has the assets.

 

[Spongebob]

I fear you may have been badly advised in issuing the winding-up petition at this stage.

The threat to wind up a company is meant to frighten the debtor into coming up with the money; it is the ultimate weapon in the creditor's arsenal.

Unfortunately it can easily be a weapon of mass destruction if actually deployed! In your case it appears to have prompted your debtor into preparing a lifeboat company for if and when the torpedo hits...

After the event, they will assume the moral high ground and point the finger of blame at you for destroying a perfectly good company which they will claim would have settled all its liabilities if the winding up had not been precipitated.

You need the advice of a good debt collector before it is all too late.

 

[Matt63]

Point taken, but the normal courses of action had been exhausted and there was little prospect of the debt being paid in a sensible timescale. Have to be careful what I say on a public forum but let's just say we felt the debtor was taking advantage of our reasonable approach.

We are certain they have the money, anyone have any suggestions how to collect the debt?

 

[Spongebob]

I have little experience in chasing debts as I never extend credit to anyone.

However, if your debtor is determined to avoid payment to the point of moving their business to the vehicle of a new company while sacrificing the old one, your options appear limited.

Hopefully one of our experts will be along soon.

 

[mhall]

A simple Court order would ensure the debt is recognised and at least gives you a chance to get something back. A winding up order you can really hide as it's not "public" to the majority of people. Nothing annoys more than a bailiff standing there embarassing you in front of your staff. I fear it may be too late though if you press ahead with the winding up order. It only takes a few minutes to "sell" a companies assets to the new one and the chances of you proving this was done to commit fraud or evade payment (allowing Companies House to investigate) is possible, but slight

I am a great fan of stat demands, but it is a game of risk and you need to use them carefully. Solicitors love them as they can increase funds and appear to be "hard", but he will shortly tell you that he has done all he can and you won't get a penny back "sorry about that, here's my bill"

There are plenty of collections agencies on here, they will be able to advise if it really is too late

 

[Alan R Price]

My company was owed a six figure sum under a contract. Shareholders of the debtor are wealthy individuals but payment was not made, so was advised by solicitors to issue a statutory demand. This did not receive a sensible response, but in the meantime the debtor acquired another business, so was advised to issue a winding-up petition. Still no sensible response. Discovered the debtor was still engaging in new contracts with new suppliers. Was advised to advertise the winding-up petition in the London Gazette. This has all been done, the court date is very soon but the debtor is continuing to trade. What happens next? I simply cannot imagine that they do want their business to be wound up, so what can they be planning?

Matt

I am an insolvency practitioner.

Assuming the debtor company does not defend the petition, a winding up order will be made. The official receiver will automatically be appointed: his role is to carry out an initial investigation into the company's affairs and if there are any assets, to procure the appointment of a liquidator, who must be an insolvency practitioner. This can be done by calling a creditors' meeting or by the OR asking the Secretary of State to make an appointment, in which case the OR will seek the major creditors' views before the appointment is made.

Frankly I do not have much confidence that the OR's investigations will produce any satisfactory outcome for you (under-resourced, under-trained civil servants - not really interested); however a liquidator has wide-ranging powers to investigate the conduct of an insolvent company and its directors and to bring actions against those guilty of causing the company losses by their misconduct. From what you say, it seems likely that assets (not just equipment but valuable goodwill, customer lists, debts owed to the company by customers etc.) have been moved to a new company - very possibly illegally - in which case the directors should have to explain their actions and account for any assets. The liquidator, not the OR, is probably the best person to deal with this. If the directors have been guilty of misconduct the liquidator can sue them for any damage caused to the company by their actions. You can have a significant influence on who the liquidator is because of the size of your claim.

Incidentally, any disposal by the company of its assets after the petition was presented is void and can be attacked by a liquidator. Employing a debt collector at this stage would be inappropriate because the company's assets now come under the protection of the court.

If you would like to discuss this informally, free of charge, please give me a call - have a look at our website - www.marshmanprice.co.uk - I will be glad to advise in more detail.

 

[Matt63]

Just an update, debtor has been in touch, and their bank accounts have indeed been frozen. They are not happy, saying that I have been unreasonable and acted far too hastily. Obviously I do not agree with their claims.

In order to unfreeze the bank accounts to continue trading, they need to seek a validation order for which they need my company's consent. My solicitors are concerned that giving this consent just on the promise of full payment would prejudice my company's options when the petition is heard in court. Anyone got any experience in this situation?

 

[Spongebob]

I've no experience of such a situation, but despite my reservations voiced earlier it does sound as if you might just have them by the goolies.

Well done!

I would tell them that you will consent to the validation order following payment of the outstanding balance. Let these wealthy shareholders dig into their own pockets if they want to keep their company afloat.

You could compromise on 50% now, 50% later if necessary as a gesture of goodwill.

Keep us posted...

 

[mhall]

Well done, it wasn't too late ! I agree with Spongebob, get total payment plus costs from the Shareholders - they can sort out how they get it back from the company, that is not your issue.

 

[Alan R Price]

Just an update, debtor has been in touch, and their bank accounts have indeed been frozen. They are not happy, saying that I have been unreasonable and acted far too hastily. Obviously I do not agree with their claims.

In order to unfreeze the bank accounts to continue trading, they need to seek a validation order for which they need my company's consent. My solicitors are concerned that giving this consent just on the promise of full payment would prejudice my company's options when the petition is heard in court. Anyone got any experience in this situation?

You and I have spoken about this on the phone but for the benefit of anybody reading this, it's really down to commercial practicalities. I have to say I don't agree with your solicitors. I don't see how consenting to a validation order would prejudice your company's options on the hearing of the petition - the court has three of options: grant the winding up order; adjourn the hearing; or dismiss the petition. It will only do the latter of the debt has been settled or compounded for to your satisfaction. The more pertinent point is what effect the freezing of the company's bank account will have. Presumably it will severely restrict its ability to trade, in which case is it jeopardising your chances of recovering what you are owed? Perhaps or perhaps not.

The court will only grant a validation order if it is satisfied that to do so will benefit the general body of creditors; for example if there is a genuine case to argue that the petition will be dismissed or that real benefit will accrue to the creditors by allowing the bank account to continue to operate, such as a pending sale of the business or a rescue being put together. It will not grant an order that allows the company's assets to diminish in the vague hope that "something will come up" if it continues trading.

Here is a summary of a case decided in the High Court in 2006:

Re Square 3 Ltd [2006]

A winding-up petition (which was advertised resulting in the company's bank account being frozen) was presented by the creditors of a company. The petition debt was paid in full prior to the return date, and the company applied for the petition to be dismissed. A validation order was also applied for by the company (which was supported by the main creditors) until the petition hearing date, pursuant to s127 of the Insolvency Act 1986. A witness statement confirmed that if the validation order was granted the company would be able to receive payments, pay all creditors and even make a small profit. It was also requested that the court should make the validation order retrospective.

Decision: The court would not grant the application for dismissal of the petition as there was a risk that other creditors might wish to give notice of opposition or support before the hearing date. The court's concern was the effect of a validation order on other creditors. It was obvious that there would be no prejudice to those creditors if the validation order was granted on the basis that they would be paid. The validation order was accordingly made, however, as future problems may be created for the liquidator, the court would not make that order retrospective.
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The facts are slightly different however the principles are clearly stated.

If you are even to consider a validation order you will need to see full financial information from the debtor company - details of all assets and liabilities and evidence that the position will improve if the order is made. Courts are reluctant to grant validation orders because in their view their role if to protect the assets and preserve them as they are after a petition has been presented unless there is a very persuasive argument otherwise.