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Contracting debtors: compulsory winding up of agencies or clients that won’t pay

Contractors owed money by an agency or a client that refuses to pay outstanding invoices can put the debtor’s business into compulsory liquidation by submitting a winding-up petition to the courts.

Compulsory winding up is a contractor’s last resort when trying to recover unpaid fees, because the process involves the court appointing a liquidator to ‘wind up’ the affairs of the agency or client, after which the debtor’s company ceases to exist.

There is no guarantee that the contractor will get paid in full, or at all, when the agency or client is wound up. However, because a contractor can halt the process at any stage before it is completed, this can be an effective debt recovery strategy to force payment or part payment when all other measures have failed.

When can a contractor issue a winding-up petition?

Contractors owed money by an agency or client that refuses to pay can wind up that business on the grounds that it cannot pay its debts, which must be proved to the courts as part of the winding-up process. Only companies can be wound-up in this way, not sole traders or partnerships.

The contractor’s limited company, which must be owed at least £750 by the agency or client, can serve a ‘statutory demand’ (download template) to the agency or client. The contractor must be able to prove the statutory demand has been served, so should consider using a professional process server, such as a private detective agency.

If the agency or client fails to pay, or doesn’t agree some form of settlement with the contractor within 21 days, then the debtor is considered to be unable to pay its debts and the winding up petition can be presented to a court.

Preparing a winding-up petition

At this stage professional assistance is highly recommended. Although the contractor may be successful in presenting the petition, a lack of expert knowledge and experience could result in costs being awarded against the contractor or the petition being refused.

So, ideally in consultation with a solicitor, the contractor should complete a winding-up petition, together with a statement confirming that the facts provided are true. The petition should include:

  • The exact details of the company to be wound up, including registered number, share capital and ‘principal objects’ from the original memorandum of association
  • The grounds for winding up the agency’s or client’s company, which will include the details of the debt owed to the contractor
  • Details of the statutory demand already issued
  • Information about previous judgements, for example a small claims or county court judgement already secured against the debtor.

If the debtor’s company has already been dissolved, all is not lost, but it does add further complications for the contractor, who could apply to have the company restored to the Register of Companies.

Serving, filing and advertising a winding-up petition

The petition is then ‘served’ by the contractor to the agency or client’s registered address. Paying for a professional process server will ensure the petition is served to the debtor, and that the contractor has evidence of this, which must be provided to the court.

If the paperwork is in order, the Registrar or Judge will make a winding up order and appoint the official receiver as liquidator of the agency's or client's company.

The petition is also filed by the contractor, or their legal adviser, with the court alongside confirmation that the petition was served to the agency or client. The petition should also be advertised in the London Gazette within seven days of the process being served to the debtor, and at least seven days before the winding-up hearing set by the court.

When submitting the paperwork to the court, the contractor will also need to prepare a cheque for £1,190 (correct at the time of writing), which includes the court’s fee of £190 and the official receiver’s deposit of £1,000.

The court hearing

Contractors will find that the hearing to consider their petition to wind up the agency or client will be one of many heard that day by the Registrar or Judge, and will typically be given a half-hour time slot on the date of the hearing.

In most cases the contractor, or their solicitor, will be seeking a winding-up order, but it is possible to halt the proceedings if the debtor has paid, or ask for an adjournment if negotiations between contractor and debtor are still underway.

If the paperwork is in order, the Registrar or Judge will make a winding up order and appoint the official receiver as liquidator of the agency’s or client’s company. The Registrar or Judge would also award costs be paid to the contractor at this hearing, assuming the contractor’s case was in order. However, if the debtor has a change of heart and decides to pay the contractor, an approved winding-up order can still be rescinded.

After the winding-up order is made and the official receiver appointed

The final part of the process is for the official receiver to advertise the winding-up order in the London Gazette and investigate the reasons why the company failed. They would do this by contacting directors of the agency or client, and/or their accountants or bank.

Then the receiver will appoint a liquidator, or possibly act in that capacity themselves, to identify, collect and dispose of any assets in order that any creditors owed fees can be paid. Naturally, this will include the contractor who instigated the process, who will also be reimbursed for the receiver’s deposit and may be awarded costs if there are sufficient funds.

The directors of the agency or client must provide information to the receiver and liquidator as requested and hand over any assets, in addition to any company records. The agency or client’s company is then officially dissolved.

It is possible that at the end of the process the contractor will still have money owing. However, if all other routes fail, being on the receiving end of a petition for a compulsory winding-up order can be a powerful motivation for many agencies and clients to pay up.

Updated: 17 March 2015

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