As businesses brace for challenges in 2025, rising costs and an increase in winding-up petitions highlight the issues surrounding unpaid debts. Creditors need to exercise caution, while debtors should promptly communicate any disputes.
As business gets back to work, the outlook for 2025 looks challenging. Early indications are that the festive season has not been as merry as many sectors would have hoped. Higher national insurance costs and the rise in the national minimum wage which will come into effect in April 2025 both signal significant increased costs for employers and concerns about whether and to what extent those costs can be passed on to customers.
A key resolution on the new year to-do list for most owner-managers will be reviewing cash flows and ensuring that there is sufficient liquidity so that debts can be paid when they fall due. An important factor in that analysis will be assessing whether enough is being done to secure prompt payment of outstanding invoices.
Recently published data shows that there has been a steady increase in the number of winding-up petitions presented to the UK courts indicating that more creditors are resorting to the liquidation process where debts remain unpaid. The presentation of a winding-up petition brings considerable pressure to bear on the receiving company and is often seen as an effective means of securing payment.
Whether your business is a creditor pushing for payment or a debtor trying to manage cash flow, a number of practical issues should be considered:
Creditors:
- should be aware that the courts have repeatedly held that winding-up proceedings are not appropriate for use in all situations;
- must not use winding-up proceedings where the debt is disputed in good faith and on substantial grounds simply to put commercial pressure on a debtor to settle a disputed debt;
- are advised to retain copies of all correspondence issued to and received from a debtor – this may prove to be vital evidence to demonstrate that the debt has not been disputed in prior correspondence and to defend any allegation that the liquidation petition is an abuse of process; and
- are at risk of adverse costs awards, potential liability in damages and/or potential interdict/injunction proceedings if the court considers that the action taken is an abuse of the winding-up process as the financial costs of these adverse findings could significantly outweigh the value of the debt itself.
Debtors:
- cannot simply avoid winding up by denying the debt is owed. Where there is a genuine dispute about the liability, the debtor should clearly set out the basis on which the debt is denied and provide the creditor with whatever supporting evidence is available;
- should notify the supplier as soon as possible where goods or services which have been supplied are not of the required standard, and a copy of the correspondence kept for future reference;
- need to ensure that proper procedures are in place so that they become aware of any winding-up petition as quickly as possible and that they take prompt legal advice;
- at risk of a winding-up petition should be aware that before a winding-up order can be made, the court will require advertisement of the petition as this publicity can cause irreparable harm to the company's business and its relationships with its customers and other suppliers – early action will be required to ensure that advertisement is not made and to allow discussions to take place to agree on a resolution to the dispute.
Winding up is very often used by creditors as a last resort when they feel that other attempts to secure payment have failed. Any correspondence which notifies of an intention to proceed with a liquidation petition should not be ignored. Debtors often think that this notice needs to be given by a statutory demand but increasingly debtors will rely on correspondence setting out the intention to wind up the debtor company on the basis that it is unable to pay its debts as they fall due.
The terminal effect of a winding-up petition will often result in little, if any, return from the insolvency process. Secured and preferential creditors, like HMRC, are more likely to receive a dividend from whatever assets are available. Many creditors will therefore be willing to agree to a reasonable repayment plan, but that resolution is more likely to be achieved where there is early engagement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
