What is a Winding Up Petition from HMRC or Other Creditors?October 12, 2018
If your company cannot pay its debts, a creditor can apply to the court to wind up your company. This application is known as a winding up petition.
Winding up petitions are often associated with HMRC but any creditor can apply for one against a company.
In this article, I'll look at winding up petitions in more detail, the differences between a winding up petition from HMRC and one from an ordinary creditor, and I will also advise on your options if you have received one.
If your business has received a winding up petition or you fear you are at risk of receiving one, I strongly advise you get in touch with an insolvency firm like 180 Advisory Solutions as early as possible. The earlier you can take advice, the better your chance of a successful outcome.
Ordinary creditor winding up petitions
With winding up petitions from ordinary creditors, the order of events typically goes as follows. A creditor will chase payments themselves and when this doesn’t result in payment they will pass it to their solicitors or debt recovery agents. If payment is still not made, the court process will begin.
The creditor business’ solicitors will take court action to obtain a decree that confirms how much the debt is that your business owes. Formal notice of this court action is served on your business. The notice will inform you of what is being claimed, ask for your arguments if you disagree and provide a date for a court hearing where a decision will be made to grant or deny the decree.
At this point, you can still argue that you do not owe the money or do not owe all of it.
If you do not respond, the court will grant the decree at the hearing date.
Once the decree is obtained, a charge for payment will be served on your company demanding full payment of the decree amount. The charge will give you a rather short deadline for payment.
If the deadline is reached without payment, your creditor can submit a winding up petition to the court. Again, your company will be served notice of such a petition being made and the notice will tell you the date of the hearing.
At this point, you can no longer argue that you don’t owe the money. However, you may be able to negotiate with your creditor to give you some extra time to pay, although they don’t have to agree to do this. The only reliable way to avoid liquidation at this stage is to pay the creditor in full.
If you are unable to pay and are unable to convince the creditor to withdraw the petition, your company will most likely be put into liquidation by the court at the hearing date.
HMRC winding up petitions
Compared to ordinary creditors, HMRC has a much more streamlined legal process related to liquidation. In other words, HMRC can have a company liquidated far more quickly than ordinary creditors.
In insolvency situations related to HMRC, the debtor company typically won't have paid its tax liabilities and HMRC will have started chasing it for payment. If the debtor company is persistent in its refusal to pay, HMRC will eventually obtain a summary warrant from the Sheriff Court.
You will receive no notice that this application has been made. The first you will know is when you are served with a summary warrant demanding payment in full within 14 days.
At this point, it is generally too late to try and negotiate any significant time to pay with HMRC.
If payment is not made in full within 14 days, HMRC will likely move almost immediately to submitting a winding up petition to the court
How does the winding up petition process work?
In the next three sections, I will look at the key stages of a winding up petition.
#1 — Commencement of the winding up petition
In Scotland, the petitioning creditor appoints a solicitor who then drafts the petition and files it with the court. (The petition is either filed with the Sheriff Court or the Court of Session, depending on the company’s share capital.)
If the court accepts the petition, it is usually advertised immediately in the Edinburgh Gazette and at least one newspaper.
Your Bank will most likely see the notice and freeze your business bank account, meaning your account is actually frozen before the court has ordered the liquidation.
Sheriff officers will also serve notice of this legal action at the company’s registered office address.
#2 — Time to respond
Once the petition has been advertised, you have eight days to lodge a defence and prevent the winding up order being executed. At this very late stage in the process, there are very limited defences available to prevent the liquidation going ahead other than paying the creditor.
While there are some effective defences available to debtor businesses, an insolvency practitioner would need to investigate your business thoroughly to understand if they would work for your circumstances.
If the court does not receive any defences to the petition within the eight days, it will appoint the liquidator.
#3 — Insolvency practitioner appointed as liquidator
If the eight-day period elapses and you haven’t submitted any defences or if the court rejects the defences presented to it, the court will appoint an insolvency practitioner as liquidator.
Once appointed, the insolvency practitioner liquidates the company’s assets and distributes the funds to its creditors. The insolvency practitioner may also investigate the company and its directors to ascertain how it ended up in such difficulties.
What should you do if your business is struggling to pay its debts and is at risk of being wound up?
The short answer is to urgently seek insolvency and restructuring advice from a suitably qualified and regulated expert, such as an insolvency practitioner. A good insolvency practitioner will meet with you very quickly and their initial advice will be free.
Here are things to consider and look out for if your company is struggling to pay its debts.
- Know where you are in the process. Given the various stages leading up to liquidation, it is important to understand what stage your creditor is at and therefore how much — or little — time might be available to you. This is particularly the case with HMRC cases as debtor companies often believe they are still at the negotiation stage when, in fact, HMRC has already begun the liquidation process.
- Do not ignore correspondence. Business owners often say they didn’t receive legal notices and that the news their company is in liquidation is a complete surprise. Unfortunately, the reason behind this is normally that the business owner has been ignoring all correspondence. Just because the business owner ignores the letters doesn't mean the legal action will go away.
- Remember to check your registered office. This is another reason why business owners are surprised by liquidation. Make sure you are actually picking up the mail from your registered office. This is particularly important if your business has recently moved premises or uses a virtual office. If you don’t collect your mail, you could have a nasty shock when your company is liquidated and the liquidator turns up at your trading address. Legally notices must be served at the registered office and that means simply posting it through the door. It does not matter whether anyone was there to pick it up.
- Don’t rely on the court unfreezing your bank accounts. Something we often hear is: “My bank says HMRC has frozen my bank account.” The reality is that HMRC has petitioned the court for liquidation, the court has advertised the petition in the Edinburgh Gazette and your bank has decided to freeze your account. Your account will not be unfrozen unless the liquidation petition is withdrawn.
- Ensure you honour your repayment plan. If you have managed to negotiate a repayment plan with HMRC, you must stick to it in full. If you miss a payment, it can very quickly lead to liquidation with no further dialogue with HMRC. Additionally, if you haven’t completed a repayment plan for last year’s tax and can’t pay this year’s tax bill, it is highly unlikely HMRC will entertain a request for a second repayment plan and will quickly move for liquidation.
- Seek advice as soon as possible. The time to seek advice from an insolvency practitioner is as soon as you find yourself struggling to pay your debts or even earlier if you experience a serious downturn in business. Unfortunately, by the time you receive notice of a winding up petition, it is very late in the day and is substantially harder to save your business.
- Make sure you take advice from the correct person. Business owners who are struggling are often preyed upon by self-styled and unscrupulous 'business turnaround experts' who have no proper qualifications and are unregulated. Before trusting someone to advise you, ask them what qualifications they hold, what professional body they are regulated by and whether they provide their initial advice free of charge. Watch out for advisers who claim that, for a fee, they can make your debt problems go away and people who say they can help you because they once had a business that went bust. Here’s an analogy I like. If you were choosing who was to save you from drowning, would you select a qualified swimming instructor or some bloke who says he almost drowned?
Whether you have received a winding up petition or have just experienced a downturn in your business, it’s incredibly important to seek help from a qualified and regulated expert, such as an insolvency practitioner.
For a free and confidential meeting, contact our team today and we will do our best to save your business.