Winding up petitions - a case study

This case study examines the recent events regarding Patisserie Valerie and the unfortunate circumstances that almost led to the company’s demise.

On 10th October 2018, shares were suspended for the AIM-listed Patisserie Holdings plc as the company launched investigations into accounting irregularities. When shares are suspended, it means that trading them on the Stock Exchange is halted.

It had been revealed that the directors of Patisserie Holdings plc, which owns a chain of cafes named Patisserie Valerie amongst other brands, were not aware HMRC had filed a winding up petition at court for Patisserie Holdings’ main subsidiary, Stonebeach Ltd., which reportedly owed £1.14 million to HMRC.

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What is a winding-up petition?

It’s a legal action that creditors can take against a company that owes them money. If the amount owed is more than £750, the creditor can issue a petition in court. The court will assign the petition a hearing date and it must then be served on the company at their registered office.

When the petition has been issued, it will be reported in the London Gazette, an official government publication. Once it’s become public knowledge that the petition has been served, suppliers and lenders may refuse to deal further with the business, making its problems worse.

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The finance director of the parent company, Chris Marsh, was suspended by the company before resigning. Since then, the finance director has allegedly been arrested and bailed on suspicion of fraud by false representation. Only Chris Marsh and Patisserie Holdings’ chief executive, Paul May, were on the directors’ board of Stonebeach.

Documents filed at Companies House show that the chairman of the Patisserie Holdings group, Luke Johnson, has since joined Stonebeach on the board of directors.

Johnson has also had to lend £20 million of his own money to allow the business to carry on trading in its current form after it was revealed that the group was nearly £10 million in debt instead of having £28 million in the bank, as it had last reported.

The case was due to be heard on 31st October, but Patisserie Holdings told the stock market that the winding-up petition had been dismissed in the High Court.

How are winding up petitions used?

Even the most financially secure company can become the subject of a winding up petition because the process is used by some organisations as an aggressive form of debt recovery.

Used in the right way, a winding up petition can be a very effective means of securing the payment of a debt for the following reasons:

• Winding up petitions can be issued at Court very quickly and because the debtor will be keen to remove the petition from the Court, the debt is usually paid promptly.

• Due to the severe consequences for the business in terms of its trading position, it is a powerful legal threat that cannot be ignored.

• Assuming the debtor pays the petition debt, the organisation making the winding up petition is then in a strong position to recover all its legal costs in full.

• It places the petitioner ahead of other creditors. If the debtor is facing insolvency issues, a winding up petition will put the petitioner at the front of the queue for payment.

• If there is uncertainty as to whether the debtor is able to settle the debt, a winding up petition is the quickest legal route to establish if the debtor is actually insolvent.

Since the process is used in this way, many companies will be served with a winding up petition at some point and will usually respond by promptly settling the debt.

What should companies take away from this case?

A director will not generally be liable for breach of duty by a fellow director as long as they haven’t conducted themselves in a negligent manner.

A director may be liable for authorising such an act, or for failing to supervise the activities of another director, in situations where they were under an obligation to do so.

In the context of Patisserie Valerie, this means that the other directors may not be liable for the alleged fraudulent acts of Chris Marsh, the financial director, unless they allowed his actions or did not supervise his actions where they were obliged to do so.

Directors may be required to represent the interests of the company on the boards of subsidiary companies. In these circumstances, it’s necessary for the directors to consider the position of each company individually as a separate legal entity and not the group as a whole.

This can cause problems where the subsidiary’s interests are at odds with or conflict with those of the parent company.

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Working with HMRC

As far as HMRC is concerned, the issuing of a winding up petition is seen as a last resort. They would rather work with directors who are making efforts to pay their tax liability, often making use of a Time to Pay agreement (known as TTP).

If that’s not possible, HMRC would use its powers of distraint to seize goods and recover the liability in that fashion. Only if these attempts haven’t borne fruit will HMRC move to the stage of issuing a petition. _______________________________________________________________________________________________

Don’t panic

The case of Patisserie Holdings is a dramatic exception to the norm. Generally, directors will be aware that a winding up petition has been put in place and will be able to take appropriate action to save the company, albeit action that must be taken very swiftly.

All managers in the business should be trained on the implications of being served with a winding up petition so that it can be prioritised for immediate action.

rradarstation: rradarstation is a resource available through the AXA MLP where policyholders can access rradar’s legal advisory team over the phone or by email and web portal that provides over 1,000 articles, step by step guidance sheets, forms, sample letters and templates to download relating to running a commercial business including commercial issues such as winding up petitions and other credit control related topics.