One of the risks of being a director of an insolvent company which goes into liquidation or administration is that your conduct will be reviewed and,…
Traditionally HMRC has used winding up petitions, sometimes preceded by a statutory demand, to bring to a stop companies which are substantially in arrears with payment of tax.
Covid caused HMRC and other creditors to go easy on debtor companies but things are getting back to normal. The number of compulsory liquidations (the court order on hearing the petition) spiked in March and is now back to pre Covid levels. HMRC accounts for the majority of such liquidations.
Voluntary liquidations and other formal insolvencies also increased materially in March and may reflect more assertive steps by HMRC to collect tax.
The effect of petitions
Petitions have an immediate and significant legal effect. If the petition is turned into a winding up order, which usually takes a few weeks, any disposition of assets, including payments from the bank account, is legally void. This can have serious consequences for the recipients of payments or assets as well as for the directors of the company in terms of their statutory duties.
Any bank receiving notice of the petition will freeze any company bank account. It is common for petitions to be advertised a week or so before the hearing date and banks pay attention to those advertisements.
Directors lose all authority over the company if the petition becomes a winding up order. If trading is continuing it will cease immediately.
So what can you do if served with a petition?
Companies can continue trading after receiving a petition. But this must be with a view to achieving a better result for creditors than abrupt closure.
There is a possibility finance can be obtained although this is very difficult after a petition is issued. More likely routes are:
- Debt restructuring, perhaps via a company voluntary arrangement
- A sale of the business and assets. Administrators are usually responsible for this
- A manged wind down to generate a better outcome than a sudden crash, possibly involving voluntary liquidation
What can we do to help?
We can help the directors to do a very rapid review of the financial position and prospects. We can advise on the options to achieve an optimal result for the company and its creditors which is also consistent with directors duties and responsibilities.
The key imperative is to take advice immediately, and act on it!