Will I be paid as a priority if I issue a winding up petition against one of my creditors?

Winding up petitions are increasingly being used as a method of debt collection. However once a petition is granted, those owed money may receive no return at all.

Business and individuals who are owed money by companies are increasingly opting to issue winding up petitions as a method of collecting their debts. However, this strategy is not without risks.

If the winding up petition is granted by the court, then proceedings for the closure of the business will start. At this point the company’s bank account will be frozen and it is unable to make payments to any of its creditors without specific agreement from the court.

If the company is subsequently ordered to be wound up, then the person or business who initiated the winding up petition will not be treated as a priority creditor. The liquidator will be paid first together with any secured creditors or debenture holders.

If there are any funds remaining after the liquidator and debenture holders have been paid, these will be distributed fairly to all remaining unsecured creditors including the initiator of the petition. Generally if a business is insolvent, there will be little or no funds available at this stage and unsecured creditors will receive little or no return.

The threat of winding up may force payment

Given that an insolvent company is wound up, little or no funds are likely to be available for unsecured creditors, why then would any such creditor consider a winding up petition?

The answer to this is that the threat of the petition may be enough to scare the company into paying its debt. If granted, a winding up petition is extremely inconvenient for the company involved as it will find it difficult to use its bank account and therefore continue to trade.

Any defence of the petition will have to be made by the company in court which will normally have to be paid for by the company directors and or shareholders. A situation which company directors clearly want to avoid.

Ensure other collection options have been exhausted before persuing Winding Up

The courts generally do not like to issue winding up petitions and will throw them out unless they are convinced that all other reasonable avenues to collect outstanding debt have been exhausted.

As such, before going down this path, it is best to issue a county court judgement first which the company will have a reasonable opportunity to pay.

Using a winding up petition is becoming more and more common as a debt collection tool largely because the threat of such action may be enough to force a payment to be made or at least a repayment plan to be agreed.

However, beware, if you start proceedings to wind up a company in the hope of collecting a debt, and the procedure goes ahead, unless you are a secured creditor or debenture holder, it is unlikely you will ever receive your money.

Derek Cooper - January 2010

If your business is in financial difficulty why not talk to us about possible solutions http://coopermatthews.com/winding-up-petition.html

Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

Cooper Matthews specialise in Business Recovery Services Advice providing straight forward insolvency advice for businesses in difficulty and business owners with personal financial problems. They have significant experience in working with small to medium sized businesses.

Prior to Cooper Matthews Derek Cooper was the Managing Director of Wilson Philips specialising in personal insolvency and financial restructuring. He previously worked for 11 years as a financial advisor for Allied Dunbar, and later the J Rothschild Partnership. Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic environment.

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