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Understanding winding-up petitions for unregistered businesses

Winding-up petitions are perhaps the most severe action that can be taken against any business by a creditor in respect of an unpaid debt. Once a petition has been issued, if the debt is not settled before the winding up hearing takes place, then it is up to the court to decide whether a winding-up order should be granted to wind up the business.

In the majority of cases, it is limited companies who are the recipients of winding up petitions. However, a winding-up petition can also be issued against unregistered businesses, such as a sole-traders, partnerships and unincorporated associations and clubs, but there are some differences to the process.

Difference between limited liability and unlimited liability

A limited company is registered at Companies House and is classed as its own legal entity. Any limited company will benefit from the protection of limited liability. This means that any company debts are the companies and not the directors. Directors are not personally liable for any company debts.

Unlimited companies are businesses such as a partnership or sole traders. This means they are not separate legal entities from their companies and owners do not have the protection of limited liability, which means personal assets, such as a house or a car could be at risk in an insolvency situation.

The winding up of an insolvent unregistered organisation

When an unlimited liability company is served with a winding-up petition, it will have the option to dispute the petition, or it can let the petition go through unchallenged. Eventually, this will lead to the winding up of the entity.

Owners or partners of an unregistered business do not have the same limited liability protection as directors of a limited company. Effectively this means you may be responsible for the debt featured in the petition and any other company debts.

If creditors cannot be repaid and the assets are not sufficient to cover the debt then as an owner, you will have to contribute from your own personal funds, to cover the money owing to creditors. Additionally, you may have to meet a number of expenses such as:

  • All debts and liabilities of the company
  • Costs, expenses and charges of the winding up procedure
  • Any monies for the adjustment of rights of the members of the shareholders

winding up petitions

See the differences between being solvent and insolvent

What are your creditors’ options when considering a winding-up petition?

The type of business you have, will have a direct impact on the options your creditors have available to them, when considering taking action against you for an unpaid debt. However, regardless of the action, your creditors take against your business, you are free to challenge it if you dispute the debt owed or the amount stated on the petition.

Your creditors will have a few options available to them which are:

  • For sole-traders
    • Take legal action against the company/ its owner. This could be by obtaining a County Court Judgement (CCJ) which if still not paid could make available other courses such as the use of a bailiff to seize goods.
    • Take action against the business owner personally such as petitioning for bankruptcy
    • Attempt to close the business by issuing a winding up petition
  • For partnerships
    • Take legal action against the business and its owners. This could be by obtaining a County Court Judgement (CCJ) which if still not paid could make available other courses such as the use of a bailiff to seize goods.
    • Submit a winding-up petition for the partnership and a bankruptcy petition against one or more partners of the company.

What can be done to avoid these actions?

It can be a nervous time when issued with a winding-up petition. There is the serious prospect of having your company wound up and liquidated, especially if there are multiple creditors.

If it’s possible, you can pay off the petitioning creditor, however, this should be done through an insolvency specialist, as once the petition has been issued you should be very cautions about the movement or transfer of company assets. There is also the option to dispute the debt, but this can only be done if there is genuine possibility that the petition is incorrect. If an agreement to adjourn the petition is made with the courts, this may result in a pre-packed sale or an individual voluntary arrangement (IVA) as there is a halt to legal proceedings, whilst restructuring possibilities are considered.

See more on IVAs

Formal repayment plans are available, but they will only be an option if you are in the early stages of a winding-up petition. An IVA would allow you to come to a repayment plan with your creditors, in which they are paid their debts in affordable monthly payments.

In summary

A winding up petition is the most serious action a creditor can take against any business. If not dealt with, it can lead to companies being forced into compulsory liquidation. For companies that do not have limited liability, such as sole traders, it means that directors can be held personally liable for company debt, as their own finances and their company finances are classed as one entity.

How we can help

If you’re concerned about the prospect of a winding-up petition, or have already received one, it’s important to act as quickly as possible. We can help guide your company to the best possible response and if you are a sole trader, we can help you come to the best solution regarding your business and personal finances.

Authored by Lisa Hogg

Lisa Hogg

Director & Licensed Insolvency Practitioner