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 followed.
Registered vs. unregistered entities
A registered company is a limited company which is registered at Companies House and usually benefits from limited liability which means that directors and shareholders are protected from having to use personal funds/assets to pay off company debts. Limited companies have their own legal identity which is entirely separate from that of the directors and shareholders of the company.
Unregistered entities, are not separate legal entities and could be sole-traders or unlimited partnerships where the owners do not have the protection of limited liability; personal assets could be at risk in an insolvency situation.
The winding up of an insolvent unregistered organisation
When an unregistered business 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 which will lead to the winding up of the entity.
As the owners or partners of an unregistered business do not have the same legal protection as the directors of a limited company. 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
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 they are considering taking action against you for an unpaid debt. However, regardless of the action your creditor takes 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 business / 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?
If you know that you are struggling with debt and you have a feeling that action from your creditors with regards to unpaid debts could be brought against you soon, get in touch with us as soon as possible for advice on how to handle the situation.
There are a number of possible ways of helping depending on your circumstances. These could include helping to raise finance or look into the possibility of an individual voluntary arrangement (IVA) which will consolidate all your business and personal debts into one monthly payment which you can afford. A partnership voluntary arrangement (PVA) can be a way to address partnership debts but this does not automatically protect any personal assets you may own.
If all creditors agree to the IVA or PVA proposal then it can be a useful way to deal with debts which have become unmanageable.
As an alternative to bankruptcy, these schemes enable you to carry on trading as a sole-trader or partner. IVAs also prevent your creditors from taking any further action against you for existing unsecured debts and it stops late payment charges or interest being added onto the debts which are already outstanding.
To find out more about IVAs, PVAs, winding up petitions, personal or business debts, get in touch with us on 0800 901 2475. Our friendly advisers will be able to provide you with the best advice quickly, confidentially and taking into account your current circumstances.