Understanding winding up petitions and sole traders

Winding up petitions are often issued against limited companies registered at Companies House. A creditor petitions the court, usually as a last resort after several unsuccessful attempts have been made to recover their money.

But creditors can also petition for the winding up of unregistered businesses. These are businesses that, due to their structure, don’t have to be registered at Companies House - such as those operating as self-employed sole traders or partnerships -  and the system operates a little differently in these cases.

Registered and unregistered companies

A registered company is a separate legal entity from its directors and shareholders. Unless the company directors have traded wrongfully or unlawfully, their liability for business debts is likely to be limited to the nominal value of their shareholding.

This differs from the owners of unregistered businesses, for whom personal liability for all business debts is a serious threat. If a creditor is owed £5,000 or more, they can present a winding up petition against the business which could result in its closure and the liquidation of all its assets.

When would an unregistered company face winding up?

There are three instances where an unregistered company could be wound up. If:

• The company is insolvent, and cannot afford to pay its debts when they fall due
• The company is going to cease business, or has been dissolved
• The court has decided on a ‘just and equitable’ winding up of the company

Using a winding up petition against an insolvent unregistered company

When a winding up petition is used against an unregistered business, the sole trader or business partners become ‘contributories’ in the liquidation process if insufficient funds are raised from the sale of business assets, and creditors are owed £5,000 or more.

This brings into prospect personal bankruptcy if the business owner(s) also lack the funds to repay. Not only are contributories liable for the company’s debts, but also the costs of the liquidation procedure and professional fees.

What action could a creditor take against contributories?

If they are owed £5,000 or more, creditors can take one of the following actions:

Partnerships

• Issue a winding up petition against the business
• Issue a winding up petition against the business, and also petition for the bankruptcy of one or more partners
• File for the bankruptcy of one or more partners, but don’t petition to wind up the partnership

Sole traders

• Issue a winding up petition against the business
• Issue a bankruptcy petition against the business owner
• Petition to wind up the business, and also for the bankruptcy of the owner

Rules surrounding bankruptcy petitions

The creditor must meet certain requirements before they can petition for personal bankruptcy against a sole trader or partner(s):

• Be owed a debt of at least £5,000
• Have served a statutory demand for payment against their debtor that remains unpaid
• Be unable to agree a repayment plan with the debtor (and assuming they haven’t made an application for the statutory demand to be set aside)

What can you do if a winding up petition/bankruptcy is threatened?

It’s important to act quickly if you fear a creditor may take action against you or your business. You can dispute the debt if there’s a genuine reason for doing so, and apply for a statutory demand to be set aside.

Your creditor may pass collection of the debt on to bailiffs if a County Court Judgment (CCJ) remains unpaid, in which case it’s important to know your rights. You may be able to raise additional finance to repay the debt depending on your overall financial situation, but in any case, seeking professional help is advisable in averting the enforced closure of your business.

There may be other formal insolvency procedures available that would allow you to continue trading whilst making affordable repayments to your creditors. An Individual Voluntary Arrangement (IVA) and/or a Partnership Voluntary Arrangement (PVA) freezes additional interest and charges on the debt, and also prevents creditors from taking further legal action whilst the agreement is in place, as long as you’re meeting all its terms and conditions.

For more information on how to deal with the threat of a winding up petition as an unregistered business, and how to protect your personal assets, call our team at Begbies Traynor.

We specialise in business rescue and recovery – we’ll provide the reliable advice you need, and make sure you understand your rights in this situation. We offer free same-day consultations, and operate from over 70 offices around the country.