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With the news that Hereford United has received a winding up notice, here's a look at what it means according to Business Recovery.
What is a winding up petition?
It is an instruction, by a legal representative of your creditor, to have your company wound up in order to recover their money.It usually occurs when the person your business owes money to has lost trust in your firm, perhaps because of a string of unfulfilled promises to pay. They will incur substantial legal costs, so must be reasonably confident that they will get at least some of their money back.
HMRC uses winding up petitions to put pressure on companies with unpaid tax bills.
Your business will be pursued for both the original debt and the associated legal fees, which could be over £1,000.
What happens when a winding up petition is begun?
You will be aware that you owe money to your creditor, as they will have been pursuing the debt for some time. However, the winding up petition could come as a nasty surprise.The petition could be served at either your place of business or your registered office. From the moment you receive it, the sale or transfer of business assets is forbidden and if they occur, the court can declare the transactions void.
After waiting seven days from delivery, the creditor can advertise the petition in the London Gazette, bringing it to the attention of your bank and other interested parties.
The moment your bank hears of the petition, they are likely to freeze the business bank accounts, to prevent sale or transfer of assets. This also takes away your ability to trade.
If you negotiate repayment with the creditor, it will now include the fees they have incurred, and it does not stop the winding up petition from being heard by the court. Other creditors, having discovered what’s going on, could also intensify their legal efforts to get payment.
How can my business survive a winding up petition?
It is very important to take legal advice, as this can be a technically complex area.For a business that’s fundamentally sound, but finds itself in this position through major cash flow problems, it’s possible to find a way through and continue trading.
If the court can be persuaded to grant an Administration Order, this creates breathing space, during which a Company Voluntary Arrangement could be entered into. This is where the company agrees with its creditors a process for repaying its debts, often over several years.
However, if the court cannot be persuaded that your business is viable, it will be wound up its assets sold to pay creditors, and your conduct will be investigated. Should you be found guilty of wrongful trading, you could be banned from holding a directorship for up to 15 years.
Here's another article about Winding Up Orders written with football clubs in mind - from Company Rescue
If a company or football club has been served a winding up petition then it usually means that all previous attempts at settling the debt have been unsuccessful. As such the creditor uses the "nuclear option" whereby they say that the club has to be wound up as it simply cannot pay its debts. An application, or petition, is made to the High Court (this is the winding up petition ) to ask the court to wind the company up.
In the football world it is usually HMRC who serve the petitions as it is the main creditor. What is more with the level of players wages the total PAYE liability of the club is usually very high. Any delay in the payments of these amounts over the HMRC does give the club a cashflow boost.
An application is made to the high court (PETITION) to ask the court to wind the company up. The important point about a winding up petition is that it has to be advertised more than 7 days before the winding up hearing. This means the process is now in the public eye and a very public indication that the club has not paid some of its debts. This of course makes everyone worry about the future of the club. Will the players be paid?, will the club continue to play?, will it be deducted points?
For most businesses once a winding up petition has been advertised the business is in effect paralysed as the bank will freeze the account in order to avoid any "disposition of assets". Football clubs are not run purely for profit but also for pleasure by their usually wealthy owners. As such, the freezing of the bank account of the club does not usually mean that the club has to shut immediately. Money is often forthcoming from other sources connected to the owners. Of course it is also not unusual for the monies outstanding to be paid personally by the owners to avoid administration. The personal circumstances of the owners are often complex and there are other companies that are involved in the actual running of the club. As such the effect of a winding up petition does not necessarily mean the end of the football club.
But the petition pressure and director being worried about wrongful trading can lead to a situation whereby insolvency proceedings are taken by the directors. This usually involved placing the company into administration. The company must then enter a CVA to exit administration usually with a new owner or new funders so it can regain its licence to play in the Football League, Premier League or the Scottish equivalents. The club will be deducted at least 10 points.
If the CVA is rejected as happened to Leeds United and then the administrator sells to a new buyer, then a further points deduction is made an emergency application often 15 points. This led to two relegations for Leeds.
Interestingly the CVA must pay the football creditors (players and leagues) 100p in 1 BEFORE any creditors like HMRC! Otherwise the CVA is not valid and further points can be deducted or the licence to play in the relevant league withdrawn the ultimate sanction.
This so called football creditors rule is being challenged by HMRC in the Courts at the time of writing.
