What are the meanings of bankruptcy and winding up


Let us first of all make sure that the terms are properly understood. Bankruptcy applies to a person or a general partnership, whereas winding up applies to a registered company. The bankruptcy of a general partnership involves the bankruptcy of each partner. The terms are widely misunderstood, sometimes by people who should know better. These are often the same people who wrongly regard the words accountant and auditor as being virtually interchangeable. In particular, 'bankruptcy' is sometimes used as a generic term for the financial difficulties of a person, partnership or company. This is not correct. One more point before moving on: winding up may be for a number of reasons. Solvent companies may be wound up as well as insolvent companies and when this happens all the creditors eventually get paid in full.

A credible threat of winding up or bankruptcy proceedings can be extremely effective in persuading a customer to pay. In fact a customer that can pay and that does not want to be wound up or made bankrupt will almost invariably do so or make a serious proposal. This does of course depend on the customer believing that it is a serious threat which will be carried out if necessary. The threat, let alone the reality, will probably seriously upset the customer and kill any chances of further business. This probably does not matter because further business is unlikely to be wanted anyway. The courts will give even-handed justice and they will give due consideration to a petition presented by a very small supplier to have a FTSE 100 company wound up. Of course FTSE 100 companies do not actually get wound up as the result of a petition presented by a very small supplier.

Instead they pay the amount owing, which is a very satisfactory outcome. Alternatively they show that the claimed debt is not owing. This route is available to small suppliers and they should sometimes take it, especially if they are felling vindictive, but they would be well advised to be very sure of their grounds and the procedure. To get it wrong might have expensive consequences.

The threat of winding up or bankruptcy may well produce the money, but actually carrying out the threat has certain disadvantages. They are:

If judgment has not been obtained and winding up or bankruptcy is therefore an enforcement measure, the first step is to serve a statutory demand on the person or company that owes the money. There are different forms, one for bankruptcy and one for winding up, but they have many similarities. A specimen example of a statutory demand on a company is shown at the end of this article. The forms may be obtained from a legal stationer. The recipient of a statutory demand has 18 days from service to apply to have it set aside. Otherwise a person or company has 21 days in which to respond.

After 21 days from service of the statutory demand has elapsed, and provided that payment has not been made and there has been no application for the statutory demand to be set aside, the creditor may present a petition. This is either a winding up petition or a bankruptcy petition and it may be presented to the High Court or to one of many (but not all) county courts. An affidavit must be presented in support of the petition which must be advertised in the Gazette. The petition will then be heard by the court which may accept it, reject it or adjourn the hearing. The petitioner must show that the stated sum is unambiguously owing and that the correct procedure has been followed. The following is an outline summary of what happens next:

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This article was sent to us by: Vince Jean at 05162010

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