Using a Winding-Up Procedure to Chase Debts

Threatening a winding-up petition as a means of collecting a debt from a corporate debtor is a powerful tool but carries with it many risks. The mere threat of a winding-up petition can be enough to elicit a response from your debtor as the publicity involved in a winding-up petition can be devastating to a business. However before you consider using such a threat, make sure you are fully aware of the key risks. An ill-advised winding-up petition can lead to injunctions against the issuer and a hefty order for costs; alternatively you may receive nothing by way of dividend in the liquidation of your errant debtor and so you may not actually end up being paid at all.

Contractual terms: In the first instance, any contract between you and your debtor should have clear express terms on the consequences of a non-payment of an invoice, for example agreed interest rates, retention of title clauses or charges over any goods supplied. If in fact the contract is silent on these issues, and payment is due solely through the delivery of an invoice, there is an implied obligation to pay within 30 days of getting the invoice or receiving the goods or service.

If the 30 day period has passed and you have a good working relationship with your customer, often the easiest way to deal with a non-payment is to discuss it with your counterpart and see if any arrangement or payment plan can be agreed.  This can prevent any disruption to service to your business, where relevant, and may protect the relationship going forward.  Any such agreement should be agreed in writing and executed as a deed.

However, if no such amicable solution can be found or the supplier fails to meet any payment plan obligations, then the next step is to use an insolvency process or county court action to advance your claim. The county court action procedure is beyond the scope of this note but we can advise on this aspect as required.

Insolvency process:  If intent on using an insolvency process such as a winding up petition, the first and necessary step is to prove that the debtor company is actually insolvent for the purposes of the Insolvency Act 1986.  This means showing it cannot pay its debts as they fall due or that its liabilities are greater than its assets.

Statutory demand: A means of proving the company cannot pay its debts as they fall due is by serving a Statutory Demand on the debtor company for a debt of at least £750.  There is no longer any requisite form to be used following the introduction of the Insolvency (England and Wales) Rules 2016 but certain information must be included and it must be correctly served.

Winding-up petition: Following the receipt of a Statutory Demand, the debtor then has three weeks to pay or respond. Normally the Statutory Demand is enough to ensure prompt payment of any outstanding debts.  If however there is no response, you can issue a winding-up petition.  The debt must not be a disputed debt.   If you follow the procedure and the court finds in your favour then the debtor will be compulsorily wound up. It is important to remember that just because you issued the petition it does not mean that you have any priority over what funds may become available, and it is possible you might not even cover your costs.

Key Risks: The key risks with this process are:

• Abuse of process: Although a winding-up petition is a common tool in debt collection, the process was not designed for this purpose. It is possible that a court could find that you have abused the process of court (especially if the sums owing are disputed, see below) and may dismiss your petition and make you liable for any of the debtor’s costs.
• The company may cease trading: Remember if the debtor is unwilling rather than unable to pay, the threat of a winding-up petition could be enough to persuade it to settle your debt first. However if it simply cannot pay its debts, the issuing of the winding-up petition will not improve this position. In fact the threat could be enough to drive the company into an insolvency process. This will have the effect of crystallising your losses and the return on your debt is likely to be minimal.
• Damaging your relationship: Consider whether the long term damage to your relationship justifies the payment in the immediate term.
• The company calls your bluff: If the company ignores your threat but you do not issue the petition your credibility and that of any further threats which you make will be damaged. This could have the effect of pushing you further down the company’s list of priorities.
• Is your debt undisputed? You can only validly issue a winding-up petition for money if the debt is indisputably due to you. A winding-up petition issued for a disputed sum is an abuse of the process of court. A standard response to a threat of a winding-up petition is to say it is disputed in the hope that you change your mind rather than risk petitioning for a genuinely disputable debt.
• Cross-claims:  If there is a cross-claim of substance which exceeds the debt owed to you, the court will only allow the winding-up in very exceptional circumstances.
• Payment to you could be void: If the company pays you after you or anyone else has presented a winding-up petition that payment will become void if the company is later wound up because of that petition. The usual process is for the petitioning creditor to apply to withdraw the petition on being paid. The court will allow this if no other creditors have indicated that they support the petition and remain unpaid.

For more information or advice contact the Thompson Smith and Puxon Insolvency team on 01206 574431 or by email at info@tsplegal.com.

The content of this Business Briefing is for information only and does not constitute legal advice. It states the law as at November 2019. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this briefing.