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When creditors are demanding payment and money is tight the easiest thing to do is pay those who are shouting the loudest. Often HMRC debts, including Winding Up Petitions, are ignored in favour of paying suppliers so that a business can keep going. However, ignoring HMRC can lead to unavoidable failure of a company.
The Monday morning winding up court in the High Courts of Justice is always full of creditors trying to avoid liquidation on the back of a Winding Up Petition by HMRC. The battle is often lost in a hearing that last only a few minutes. If the court decides that a winding up order should be made there is no second chance, the company will liquidated there and then. The Official Receiver will be appointed to take control of the business and assets.
If your company has a Winding Up Petition issued against it, the company only has 7 working days within which to pay the debt before the petitioning creditor is entitled to advertise the petition in the London Gazette. This is a public advertisement and can in itself cause a company to fail.
Once a bank finds out that its customer has a petition issued against it, accounts will be frozen. The reason for this is that any ‘disposition of assets’ (which includes use of cash at bank) by a company after the date a petition is issued is void. This means that suppliers and staff can’t be paid and advisers (including a proposed CVA supervisor – see below) will not accept the payment of fees from the company. If they do the payment could be clawed back. This makes it difficult for directors to get the help they need. The company will therefore need to borrow money from other sources, usually its directors, and these loans may be irrecoverable if the company cannot be saved.
The Court can order that the company may use its cash to make certain critical payments (e.g. to pay staff or pay for business critical supplies) if this will mean that the company will be in better (or at least no worse) shape, should it go into liquidation, than it would otherwise be. This way the Court can ensure that the general body of creditors are not worse off as a result of certain other creditors receiving payment in priority. However, to obtain this ‘validation order’ from the Court the company needs to navigate the legal system, file evidence, put forward a compelling argument and deal with objections and is likely to need to engage the services of a lawyer. The company will need to find funds to pay these fees from elsewhere. This means that few companies can afford to make a court application.
If steps are taken early enough it may be possible to save a company. A time to pay arrangement may be reached with HMRC or a Company Voluntary Arrangement (CVA) could be proposed to creditors.
A CVA is a proposal put to unsecured creditors to pay the full amount of the debts due over a period of time or to pay a proportion of it (for example 40p for every pound owed). Provided creditors can see that the proposal is to their benefit and would be a better return than if the company failed, the arrangement may well be accepted and the business can continue as normal.
The proposal is put together with the help of an insolvency professional who acts as the ‘nominee’ and then becomes the supervisor of the arrangement, if it is accepted.
75% of unsecured creditors voting (calculated by the value of their debt) must agree to the proposal but if they do, all unsecured creditors are bound by the arrangement. HMRC are often the largest unsecured creditor and so its agreement or refusal to the terms offered can be pivotal to the success or failure of the proposal. Engagement with HMRC early on will give the company an indication of whether it will be worth making a proposal. Directors should therefore seek advice early on.
It is still possible to rescue a company in this way after a petition has been issued but it is far more difficult.
Robert Moore at Company Rescue, an advisory company that Pitmans Law has supported on CVA matters, said: “Directors would be well advised to remember that HMRC is what is termed a ‘sophisticated creditor’ and has large resources which enable them to make full use of the legal system to recover money. HMRC should not be ignored in times of trouble. Early engagement will assist any rescue plan.
“If a company receives a threat of a Winding Up Petition from HMRC then it is advisable to seek professional advice immediately. It may be that HMRC can be persuaded that it would be in its best interests to allow the business time to pay back the debt. Or depending on circumstances a Company Voluntary Arrangement could be used to rescue the company. In both instances the business has to be viable going forward. HMRC will need to see realistic forecasts and evidence that the business can change. The conduct of the directors may also be relevant. Directors should ensure that they keeping proper accounting records and should not draw money out of the business at a time when the company cannot pay its creditors.”