If you have received a winding up petition, stopping the effects of the petition urgently are of paramount importance if your charity or not-for-profit organisation is to survive or if you are to control its orderly wind down.
There are several ways to stop a winding up petition:
- Pay off the petition debt either in one lump sum or over an agreed and very short period of time
- Seek to enter into a Company Voluntary Arrangement (CVA)
- Seek to place your organisation into Administration
- Consider a voluntary liquidation
The financial position of your organisation together with your desires will dictate what can be done. If your organisation has a future then paying off the petition debt, entering into a CVA or entering Administration will be the solution. Where your organisation has reached the end of the road and you want to be in control of conducting an orderly wind down of its affairs then placing it into voluntary liquidation will be the solution.
Some of the solutions are quicker to implement than others, but whichever solution is appropriate the longer you take before seeking advice the narrower the options will be and stopping the petition may be even more costly. The more costly the process the more it may hamper the fulfilment of the objectives of your charity.
Where the organisation has reached a terminal point, having control of the winding down process may be the best outcome for all concerned. In a court (compulsory) liquidation of a charity, which happens when a winding up order is granted, any monies available for creditor are subject to fees charged by the government. This means the level of monies available for your organisation’s creditors and/or another charity (if applicable and there is a surplus) will be lower than they would otherwise be.
It is unlikely a winding up petition has been issued by accident, which means your charity is facing insolvency. This could be due to falling income, rising costs, losing a court case, or a number of other issues. The primary reason at this stage isn’t important, the most important issue is to wrestle back control of the situation.
When a creditor issues a charity a winding up petition the creditor puts your charity under severe pressure and their actions will force it to cease trading by the simple action of advertising the existence of the petition.
Seven business days after the petition is delivered to the company the creditor can advertise it in the London Gazette.
When the advert appears the bank account will be frozen. With any organisation as soon as this happens the business is practically over because wages cannot be paid, rent will not be paid, insurance will be cancelled where premiums are collected by monthly direct debit.
The bank account is frozen due to the potential liability that could fall on the bank if payments are allowed to go out once the petition is advertised. It is possible to reverse this position with something called a validation order from the court
A validation order tells the bank it will not be liable for the bank account movements that are approved by the court. This doesn’t guarantee the bank will allow the account to be used, but it is uncommon for a bank not to allow the account to be used as per the court order. A validation order can be reasonably expensive therefore taking urgent action when a petition is received is always recommended.