Why Draft-Winding Up Petitions Work So Well
Usually when a company owes a debt, their creditor can file court proceedings against them in the hope that they will pay – and use a method of enforcement to recover the money if not. However some circumstances, such as a debtor refusing to engage, make this method of debt recovery an unsuitable option. This is where strong action is needed: A Draft Winding Up Petition (WUP).
What is the difference between a Winding Up Petition and a Draft?
A Winding Up Petition is a petition sent to Court to wind up a company that cannot pay an undisputed debt. A company who cannot pay a debt on demand is deemed insolvent, and this petition starts the process of liquidating them. If a company refuses to engage with their creditor about any outstanding amounts, threatening liquidation is a good weapon for debt collection.
The creditor can ask a solicitor to create a WUP, but hold off on serving it formally. It will be sent only to the debtor with an accompanying letter warning them that if they do not settle the debt within a set time period (usually seven days) then the petition will be submitted at Court. This is known as a Draft-Winding Up Petition. The debtor will be motivated to avoid Court and liquidation, and Lovetts have found that 81% of Draft-Winding Up Petitions result in full payment of the debt.
What happens when a Winding Up Petition is formally served?
If a Draft-WUP did not achieve the desired effect, the next step is to go to Court. This is the process followed in that situation:
- The petition is presented (i.e. sent to Court for a hearing date to be given)
- The petition is served on the company’s registered office
- After at least 7 days has passed (but at least 7 days before the hearing is due), the Winding Up is advertised in the London Gazette.
- Once the Winding Up has been advertised, the debtor’s bank will freeze all company accounts. This effectively prevents them from continuing to trade.
- At the hearing, the Judge will hear the petition and make a Winding Up Order against the debtor unless they provide a defence or prove they can pay the debt.
- Once the Order has been made, the official receiver will start the process of liquidating the company and distributing the assets to the creditors.
- The directors of the company being wound up will be investigated for any wrongful trading. If they are found to have been accepting credit with no expectation of being able to pay it back, they may be found personally liable for certain debts.
When a company goes into liquidation, there is an order of priority when it comes to the distribution of assets.
There are certain criteria to meet before sending the Petition:
- The debt must be a at least £750. Usually this debt recovery option is used when the debt is much larger than this due to the legal fees involved.
- The debt must be undisputed. If the debt is disputed, this may result in an injunction against the petitioner, the petition being thrown out of Court and the creditor being ordered to pay the other side’s legal costs.
- The debtor must be a company, not an individual. The bankruptcy procedure is slightly different for an individual.
At Lovetts we have found the Draft-WUP is much more effective than a Statutory Demand, resulting in payment 81% of the time. Not only does it come with the threat of being liquidated, it also provides only 7 days to take action whereas the Stat Demand gives the debtor a full 21 days to continue delaying payment.
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