With the recent increase in Court fees, many clients are faced with having to look for alternatives to issuing traditional Court proceedings. Even for larger debts, Winding Up debtors (applicable when the debtors are companies or LLPs) was often seen as quite an expensive option, but not any more. In County Court proceedings, regardless of the hike in Court fees, there are various protocols that you have to go through in respect of debt recovery that may put a loading on fees upfront. The beauty of Winding Up proceedings is that you can issue them relatively quickly and, as long as the debt is undisputed, it is relatively swift and risk-free.
There are a number of consequences of insolvency proceedings which may make it a more viable option than County Court Proceedings as detailed below:-
1. Your Debtor should stop trading if insolvent.
The Insolvency Act provides that an insolvent Company must cease trading immediately. To continue trading with no means to pay creditors, suppliers, employees etc could be construed as wrongful trading, which can result in stiff penalties in the form of disqualification and contributory payments from the Company’s Officers.
2. The Company Officers could he held personally liable.
If a Company continues to trade insolvently, Directors could be personally liable for any debts that accrue during that time period. There are also criminal sanctions pursuant to The Companies Act should a Director breach their duties.
3. Consequences of adverse publicity.
Unless a Winding Up Petition is dealt with extremely quickly, it will be advertised in the London Gazette and probably be picked up by most Credit Reference Agencies. This could do untold damage to the Company. Creditors, customers and anyone who sees this information will know that the Company should have ceased trading and may look elsewhere for their needs rather than awaiting the outcome of the Petition. It is also unlikely that their suppliers will extend any further lines of credit.
4. Frozen Bank Accounts.
One of the greatest difficulties for a Company subject to Winding Up proceedings is that the Bank who offers lines of credit will almost certainly freeze the same causing immediate cash-flow problems. During the process of the proceedings, the Regulations state that a Company should cease trading, the Banks will know this. It could also mean that there will be no funds available to them to actually fight any legal battles should they choose to do so.
5. Costs of disputing the Petition.
It is possible for the Company subject to a Winding Up Petition to obtain a Validation Order to obtain funds to enable it to dispute the Petition but it’s a complex and expensive process. Your opponent must also consider that in order for a Court to give your Debtor a Validation Order, they will require a whole host of documentation such as Management Accounts, to prove that the Company has sufficient funds. The Validation Order itself could be used to pay your debt, but all accounts not subject to the Validation Order would still be frozen.
6. The real threat posed by Winding Up.
Few Directors are aware of the problems caused by the issue and advertisement of a Winding Up Petition. As previously stated, not only will the Bank see adverts and read credit reports, but so will their suppliers and creditors. As soon as other creditors find out about it, they could support the Petition, meaning that the debtor Company is left with a number of creditors to pay off to avoid being wound up.
We inform debtors of the above issues and make it clear that we will utilise all and every available option open to our clients. Given the consequences above, some of our clients find that the merest threat of Winding Up pushes them up the list of creditors and ensure that they get paid before others. The debtor company may be more prepared to have a County Court Judgment registered against them rather than risk being wound up. Debtors may deal with your claim more urgently if you threaten to wind them up as it could mean that there is a risk that the debtor Company ceases to exist if a petition is successful. Winding Up could therefore be the process just for you if you want to succeed in the RACE FOR PAYMENT.
For full costings of the winding up process and further information, please click here.
Please note that the winding up process is not always the appropriate step to take depending on your particular circumstances. We will advise on the best option for you on a case by case basis.
If you do need any further advice on this topic, please do not hesitate to contact Nick Brown on 0151-650 6836 or firstname.lastname@example.org.