Winding Up Petitions

We are a Scottish registered company and a creditor has threatened a winding up petition. Is the procedure in Scotland different to that in England? Yes, the winding-up petition process in Scotland is significantly different and often more immediate than in England, which can severely limit a company's options. The key difference lies in how and when the petition is made public.The Process in England In England, after a winding-up petition is served, there is a delay of at least seven days before it can be advertised. The petition must be advertised in The Gazette at least seven days before the court hearing. This "grace period" is crucial for a company. Once a bank sees the advertisement, it will almost certainly **freeze the company's bank account**. Banks do this to protect themselves, as a liquidator can later reclaim any payments made after the petition was served. This freezing of the bank account is often a fatal blow, but the seven-day delay provides a window of opportunity for directors to seek advice and prepare a response.The Process in Scotland In Scotland, the process is far more immediate and damaging. The minimum debt for a winding-up petition is £10,000. When the petition is lodged with the court, a "First Order" is immediately given, which authorizes both service and advertisement. Crucially, the petition is also "Walled" so pinned to the court's public notice board. Banks actively monitor these wallings. As soon as a bank spots a walled petition, it will immediately freeze the company's bank account, often before the directors are even aware of the action. This leaves the company with no access to funds to pay staff, suppliers, or legal advisors. This immediate freezing of funds can be a "knock out blow" that prevents the company from lodging a defense or proposing a Company Voluntary Arrangement (CVA), often leading directly to liquidation. There is no grace period for advertising as there is in England.Our Advice To mitigate this risk in Scotland, we strongly advise directors to lodge a "caveat" with both their local Sheriff court and the Court of Session. A caveat requires the court to notify the company if a winding-up petition is being pursued. This notification provides some lead time, allowing directors to prepare answers and a potential CVA proposal while the bank account is still operational. This small window of opportunity is vital for a company to have a fighting chance to continue to trade and seek a solution. A winding-up petition can be the death knell for any company, and in Scotland, the speed of the process makes acting quickly to lodge caveats and prepare a defense all the more critical.So if you feel under threat then DO NOT DELAY and talk to Eirlys Lloyd our expert advisor on these matters on 0131 242 0081 or 08009700539

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Firstly...what does 'being served a winding up petition' mean? 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.  Southend United were the latest to feel this action. And the process? An application is made to the high court to ask the court to wind the company up.20-75 days after the petition has been sent to the company and a hearing is arranged in the High Court or Court of Session in Scotland, for the Court to consider whether it should put the company into compulsory liquidation or not.Note, the winding up petition has to be advertised more than 7 days before the hearing. This puts the process in the public eye and gives a very public indication that the club has not paid some of its debts. As expected, this 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 involves placing the company into administration. The company must then enter a CVA to exit administration usually with a new owner or funder 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 before in the case of Leeds United when the administrator sells to a new buyer, then a further points deduction is made - 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. Given that HMRC are now preferential there is unlikely to be any payments for other creditors. HMRCs Involvement In the football world it is usually HMRC who serve the petitions as it is the main creditor (as of December 2020 anyway!).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. Updates At the most recent Owners’ and Executives’ Conference and AGM, a number of new rules were decided regarding the insolvency process and football clubs. The League’s Insolvency Policy has been changed to include the following:Football clubs are no longer required to enter a company voluntary arrangement (CVA) 12 points deduction for a club going into administration (up from 10 points) Continuing to support the Football Creditors Rule whereby football debt is paid before any other creditor (like HMRC). Administrators must have 21 days at least to market a football club that’s in administration, and meet the club’s supporters’ trust to allow them to put forward a bid. Buyers of football clubs (in administration) must pay back creditors a minimum of 35p in the pound over three years (or 25p if transferred by shares). If this isn’t followed, there will be a 15 point deduction the next season. If an individual buys a club with 10% shareholding or more, he/she must inform the Football League.The League wants to focus on strengthening their insolvency policy to make it fair to employees, supporters and creditors.A possible downside to the 21 days rule could be the club is on the market for a considerable amount of time. This could cause the business to lose value over time if suppliers and customers lose faith.

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You can prevent a winding up petition being served on your business if you act fast. You can either pay the debt or talk to the creditor concerned and see if they will accept a time to pay plan.

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