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  What is a Winding Up Petition?  

Corporate Insolvency : The options available...

Company insolvency is a situation whereby a company is unable to pay its debts when they are due to be paid. There are two basic definitions of business insolvency, namely cash flow insolvency where the company cannot pay its debts due to a lack of cash, and balance sheet insolvency where the assets of the company, including those that cannot be immediately realized for cash, are less than the total sum owed. In other words, the company's liabilities exceed its assets.

Company Voluntary Arrangement (CVA)

Once a company is insolvent, it has several options available. If it is only cash flow insolvent it can take a loan based on its fixed assets such as the equipment or buildings, but this is rare. Generally a company will come to a Company Voluntary Arrangement (CVA). 

This is a legal agreement whereby the company pays its creditors a sum, usually monthly, over a term that pays most of the debt but not it all, and the remainder is written off if the payments are adhered to. This company insolvency arrangement is supervised by an Insolvency Practitioner and if the arrangement is broken then the company will generally go into liquidation.

Administration

Administration is a company insolvency arrangement designed fundamentally to offer the creditors of a company a better solution than liquidation where they are liable to receive back little of their debt. An appointed administrator, again a licensed insolvency practitioner, manages the affairs of the company with the interests of the creditors their equal concern. The administrator is working to come to the best solution for both the company and the creditors.

The administrator can restructure the business or make whatever changes are necessary to keep it operational, and contrary to popular belief an administrator's function is not to close the company but to try to keep it going, but still maintain payments to creditors. If this fails it will then be put into liquidation.

Immediately after appointment, the administrator can carry on with a pre-arranged sale off the company, frequently to the previous owners or directors who can then resurrect the company as a 'Phoenix' and continue operating without any debt. The sale proceeds are distributed among the creditors. This pre-pack administration is a form of company insolvency arrangement that is often unpopular with creditors, because they could find themselves supplying the same company that previously owed them cash.

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Voluntary Liquidation

The directors or shareholders of a company can decide that it should be liquidated, and it then enters voluntary liquidation. The Court is not involved in this company insolvency arrangement, and a licensed Insolvency Practitioner is appointed to liquidate the company. However, if the company is insolvent a creditors' meeting must also be called so that they can appoint their own liquidator, and if they choose to do so the company must comply. The liquidation is then a Creditors Voluntary Liquidation (CVL). 

Were the company still solvent, the creditors would not become involved and it would be known then as a Members Voluntary Liquidation (MVL). With the CVL, the liquidator sells the company's assets and after costs have been deducted, these assets are distributed among the creditors according to how much they are owed.  Employees are also regarded as creditors, and will receive a maximum of £800 each to cover redundancy and back-pay as a priority before ordinary unsecured creditors. 

Winding Up Petitions

When everything fails, or perhaps when one creditor is unhappy with a condition of voluntary liquidation or other company insolvency agreement being drawn up, any creditor owed more than £750 can present a winding up petition to court.  The company must first be informed of this, when they have the chance to either pay of the debt or come to an arrangement.

Failing that the petition will be published in the London Gazette (Edinburgh Gazette if in Scotland) after which time there is nothing that can be done to make any other arrangement. Some people announce their intention to issue a winding up petition as a means of forcing payment from a company, but if the company cannot pay then liquidation is unavoidable. Once announced, the banks will generally freeze the company's accounts and all trading must legally stop, including share activity.

Finally

These are the various options commonly available to businesses in the event of company insolvency.  Which is followed is a matter initially for the company and then for the creditors. In any of these circumstances the directors of the company must act with the greatest integrity for the benefit of the company and its shareholders without breaking the law and trading unlawfully. Anything else could result in their suspension and being held responsible for any financial loss arising from their actions. 


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How to stop a Winding Up Petition
When to use one
How is a Company wound up?
What happens to the directors?
What happens to the Employees?
What is a Pre-Pack Asministration?
Corporate Insolvency


 

 

 
 


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