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HMRC want to liquidate my company

If HMRC are threatening to put your company into liquidation it will mean that they have to apply for a winding up petition which will force the company into compulsory liquidation.

A winding-up petition is the severest legal action which can be made by any creditor. A county court judgment (CCJ) or a statutory demand typically proceeds a winding-up petition and are necessary as the court needs to be convinced the creditor has exhausted all avenues to collect the debt owed. Due to the costs involved in issuing a winding-up petition normal trade creditors only resort to such action when it is absolutely necessary. HM Revenue and Customs, however, issue a large percentage of the total annual, as they are referred to as an involuntary creditor. This means if a company simply continues to trade, the debt owed to them increases and the only way to stop this is for HMRC to close the company down via a winding-up petition. HMRC do not need to issue a CCJ or a statutory demand before issuing a winding-up petition, but generally, they will have arranged a ‘time to pay’ agreement with a company that has failed.

If a winding-up petition is issued, it means that HMRC is extremely serious about recovering the company’s debt, even if it results in people losing their jobs and the company no longer being in business.

Once the court has received the winding up petition application, a date will be given for a hearing.

As soon as a winding up petition is issued, the company can no longer:

  • Dispose or sell any of its assets or the company itself. If a sale is made when a winding-up order is granted the sale can be reversed.
  • Issue a Notice of Intention (NOI) to appoint an administrator. This effectively means the company cannot enter administration voluntarily without court approval.

If there is no response from the company and no defense lodged, the judge will issue a winding up order forcing the company into compulsory liquidation.

What are the available options when a company is issued a winding-up petition?

Given the serious nature of a winding-up petition, contact our specialist insolvency team to guide you through the options available.

The options available, depending on the individual circumstances, will be (but not limited to):

  • Make payment in full. However, be aware the original debt will have increased due to petitioning costs and legal fees. Also if the company has other significant debts this might only be a short-term option. We strongly suggest getting some professional advice from one of our team before making payment.
  • The petition can be defended if part or the full amount ‘claimed as owed’ by HMRC is disputed. Often HMRC will estimate tax owed especially if accounts have not been submitted to Companies House and the company is behind on its tax returns.
  • There are two options if you want to wind the company up and in effect ‘shut up shop’ and walk away:
    • Compulsory Liquidation
      If the debt is agreed as owed the director have the opportunity to ‘not defend’ the petition and allow the company to be forced into Compulsory Liquidation.
    • Creditor’s Voluntary Liquidation (CVL)
      A Creditor’s Voluntary Liquidation (CVL) can be proposed. However, if HMRC accepts this course of action, the petitioning costs and legal costs will need to be paid by the directors to have the petition set aside. Once the petition is set aside a Wilson Field insolvency practitioner will have time to place the company into a CVL.
  • If you would like to attempt to rescue the business there are various options open to you:
    • Company Voluntary Arrangement (CVA)
      HMRC support CVAs and will usually set aside the petition to give the Insolvency Practitioner enough time to draw up a CVA proposal. By providing a proposal it is accepted HMRC will drop the petition, however, the petitioning costs and legal fees incurred costs related to the petition will be added to the proposal.
    • Pre-Pack Liquidation
      If the company is placed into CVL the directors can ‘buy back’ not only physical assets but also book debt and the trading name. The process of voluntarily liquidating a company, buying back the assets and starting a phoenix company is called pre-pack liquidation.
    • Administration
      If administration is your preferred option, once we have been instructed, a presentation can be made to the court on the directors’ behalf. The report will give reasons as to why it would be more beneficial for the company to enter administration instead of being wound up through compulsory liquidation. Providing there are valid reasons and it can be shown it would be in the creditors’ best interest, the petition is dismissed and the company formally enters administration. Once in administration, the administrator has three options:

      • The business and its assets can be sold as a going concern to a third party.
      • The business and its assets can be sold to current shareholders or directors at market value. If sold to connected parties this is known as a pre-pack administration. A pre-pack scenario will have most likely been discussed and agreed with the connected parties before the appointment of Wilson Field as administrators.
      • The administrator can propose a CVA which will allow the company to repay a percentage that is acceptable to the creditors or all of its debts over a period of time (usually 5 years).

What happens if the company wants to dispute the petition?

If, as the directors believe the petition is unfair and would like to dispute it, you are advised to seek immediate legal advice. We can put you in touch with specialist insolvency lawyers who possess the necessary expertise In some cases, it might be legally possible to stop the advertisement of the petition being published in the Gazette if there is a dispute about the claim made. We are able to offer advice about this issue and introduce you to a suitable independent solicitor that will be able to provide assistance regarding the prevention of a winding up petition being advertised in the London Gazette. This can be done by either formal negotiating with HMRC or by getting an advertisement restraining injunction. Failing this, the advert for the hearing for the petition will be published in the Gazette which will mean the company’s bank account will be frozen.

In a scenario in which the petition has been published, the company may be able to call for a hearing adjournment, however, the company will need to give legitimate reasons for this.

What’s involved with a petition advert?

Before an advertisement can be published in the London Gazette, the creditor must allow seven days following the serving of the petition at the company’s registered office. The advertisement must also be published at least seven days prior to the date of the hearing.                    

Following the advertisement of the petition

  • Freezing of company’s assets and bank account
    Banks and lenders monitor the London Gazette so will know about the petition and will typically freeze any bank accounts belonging to the company on the date of, or very shortly after the advert is published. They do this stop any sale or disposal of company assets which includes the withdrawal of any monies held in a bank account. Under section 127(1) of the Insolvency Act of 1986, when a company is faced with being wound up, any transfer of shares, the sale of assets or withdrawal of cash from the company’s bank accounts, made after the winding up petition has been commenced may be voided. This process can mean that the company is paralysed and all trading effectively has to cease. Credits can be accepted into the bank but payments of any kind (direct debits, standing orders, cheques etc) will not be honoured.
    The only way of getting a new bank account operational after it’s been frozen is to apply to Court for a ‘validation order’. The judge will need convincing that ‘unfreezing’ the bank account is in the best interests of the company and its creditors and the assets will not be diluted. We are able to offer advice on this procedure. For a more detailed explanation of validation orders click here.
  • Court hearing
    If the debt is not disputed, or a dispute is dismissed the Court will issue a winding up order and the company will be forced into compulsory liquidation. If a dispute is upheld by the Judge the petition will either be dismissed or payment terms for paying the debt will be set out.
  • Compulsory liquidation and investigation
    When a winding-up order is made by the Court, the company enters into compulsory liquidation. The Official Receiver (OR) or the liquidator that the OR has passed the case to will carry out an investigation into the activities of the director(s) to make sure they have acted appropriately and legally, as required by their fiduciary duties. If evidence can be found of wrongful or fraudulent trading the liquidator might recommend the BIS carry out further investigations, which could result in a director being banned for up to 15 years.
  • Directors may become personally liable for the debts of the company
    In the event a director is guilty of wrongful trading, he or she may be liable personally for the company’s debts during the time he or she knew, or should have had knowledge that the company was insolvent.

How do directors protect themselves from being personally liable?

The director must ensure all actions they carry out and are noted. The company’s assets should be listed and not disposed of. Ensure such things as bank statements, company accounts, and management records are both protected and available to the OR, or liquidator when required. Directors are required to respond to information requests by either the liquidator or the OR, not doing so is a criminal offense. The sooner action is taken to get professional advice from us the better the outcome will be.

Authored by Fiona Grant

Fiona Grant

Licensed Insolvency Practitioner & Court Department Manager