Written ByKeith Steven
Managing Director
He has rescued hundreds of companies and helped many of them turn around using CVA or pre pack. Could he help YOUR company?! Call him now 07833 240747
The following guide to bankruptcy cannot be comprehensive, given that it is a general discussion of the process, application and exit from a mechanism that can be very complex depending on your individual circumstances. It is important that you seek professional advice before entering bankruptcy. Other alternatives are available and it is vital that you consider all of those options by reading them on the site or contacting us by email or phone. Read through our IVA and SIMIVA pages if you wish to look at other options.
First things first, companies can’t go bankrupt, only individuals can. Usually the press describe a business going busy as bankruptcy but this isn’t the correct term. If it is the end of a business, it is usually liquidated.
In the UK, 10-15,000 people each year enter into bankruptcy. In recessionary times, this can rise as high as 25-30,000 people, therefore you are definitely not alone in this.
Bankruptcy is considered as the last resort so it is crucial to review your situation and ask yourself some important questions before you proceed. Are you insolvent? Is the business no longer viable? If you’ve answered yes to both of these and you’ve look at all the available options, read on…
Since 2004, bankruptcy rules have relaxed. A partner in a partnership who files for bankruptcy can usually be discharged after a year (as long as there are no issues of fraud etc). Before 2004, it was three years.
Bankruptcy is now a quick and powerful process, helping individuals move on with their lives. There are also an increasing number of lenders out there that can provide credit and mortgages to individuals who have filed for bankruptcy in the past.
To enter bankruptcy, the individual, creditor or supervisor of the individual can petition the court. You must collect all the relevant information, such as financial accounts of the business, legal actions against you, financial and business plans, personal creditor statements and a list of all your assets (and their value). You must also produce a statement of affairs (your supervisor can help) known as SOFA, which compares your assets against your liabilities. Each partner will need to have his or her own statement of affairs.
Together with the above, take all notes and minutes of conversations and emails with creditors as these will provide a record of events to assist you with proceedings.
Only stop trading when you can no longer continue with the current cashflow or you have been advised by a solicitor or insolvency specialist to cease trading.
If you wish to file for bankruptcy, contact your local County Court and ask for a ‘debtors petition’ pack. There may be a fee for this but it’s worth noting Court officials should be able to help you complete the application and answer any further questions you may have.
Once you’ve given the completed form to the Court, a hearing will be arranged and your petition will be addressed.
It is usually best if the debtor starts the process as it can take off pressure right away and will ensure creditors don’t add extra costs to the proceedings if they do it themselves.
If creditors can prove they are owed debt by the individual, usually in the form of a County Court Judgement or Statutory Demand, they can issue a petition for bankruptcy. Creditors can try to recover money owed by using a bailiff or warrant.
As a creditor, HMRC can initiate the petition if there are outstanding VAT or PAYE payments. If the business isn’t viable, bankruptcy may be the best solution.
If it is too expensive for the individual to file bankruptcy, he or she can wait for the creditor to issue the petition, however this isn’t recommended as it gives the wrong message. Creditors and the court may think the individual has ‘buried their head in the sand’.
If you have previously entered an individual voluntary arrangement (IVA) which has failed, your supervisor can petition for your bankruptcy if payments have been missed or the IVA terms have been breached. If you’re concerned the IVA is failing and your under severe financial pressure, call us on 08009700539.
Before the supervisor can issue a petition, he or she will need to provide an abort certificate to you and your creditors, explaining why the IVA has failed. You will most likely know this already and have been in talks with your supervisor.
At the hearing, the court will look at all the information you or the creditors have provided and will grant bankruptcy. The Official Receiver (OR) of the court is usually appointed trustee in bankruptcy, however an Insolvency Practitioner may be appointed by the Official Receiver or the court if there are significant assets. The IP will be able to recover assets over time to pay back creditors.
The OR will check through all the documents and account information when bankruptcy has been granted.
The individual’s estate consists of all his or her assets, which can include partially owned assets. The individual will have provided estimates of how much of these shared assets he or she owns in the SOFA. Shared homes or vehicles under a partnership agreement may only be partially available to the trustee on behalf of the creditors.
The undischarged bankrupt is allowed to maintain tools of the trade, which can include items like a modest motor vehicle and hand tools etc. Large tools such as lathes and machinery will usually not fall into this description unless they have little re-sale value. And, where furniture and other items belonging to the bankrupt are under disputed ownership, it is unlikely that the trustee will seek to recover them. For example a TV bought jointly by husband and wife.
Pension funds are usually included in the estate and are available to creditors. This is a very complex area and information can only be general in this regard on this website so please contact an insolvency practitioner for specific advice.
Some debts will not be dismissed, like CSA (Child Support Agency) payments, maintenance costs to spouse, government fines and mortgages.
The trustee usually has access to 50% of the matrimonial home for creditors, however it may be possible to keep the home if you can continue to make mortgage payments.
For example, your partner may have enough income to continue making payments or there may only be a small amount of equity available to the trustee.
The Trustee can register a Caution for the Land Registry to prevent the home from being sold (without the Trustee’s position) if the bankrupt individual has equity in it.
Sadly, if the individual gains new equity, this can be available to creditors’ years after the individual has been discharged.
An undischarged bankrupt cannot be a member of parliament, Justice of the Peace or an insolvency practitioner. If you enter bankruptcy, other professional qualifications may be affected, for example solicitors, accountants and auditors. You also cannot be a member of the local authority. If you’re unsure how your qualifications or training will be affected and you need some advice, contact the professional organisation.
If you get a new job and it is a higher salary than before, the trustee can seek to retrieve a percentage of the difference in income, known as an Income Payment Order.
If you fail to comply, this can be taken to court and put to a judge. The trustee may sell property or other assets on the creditors’ behalf.
After you have been made bankrupt, you cannot be a director, manager or act in the formation of a limited company in the UK as it is a criminal offence to do so. You can also not be a partner in a partnership. You can continue to trade as a sole trader, however you must not use a new or different name.
If you need to obtain credit during bankruptcy, you will need to disclose your situation to the lender or business.
After the bankruptcy term has finished, you will be discharged. Most debts will be written off, however some, like child support, mortgages etc won’t be written off. After you have been discharged, you may become a director or partner again and can begin to work on your credit rating.
This is a general guide and should be not be used as legal advice. You must get professional advice from a solicitor or insolvency practitioner before you proceed and be aware of all available options.
We would like to point out that bankruptcy is not as scary as it seems and can often help people let go of worry and stress and continue their lives, often happier and wealthier in the long run!
What is a CVA? | Company Voluntary Arrangements Explained
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What Is A Winding Up Petition By HMRC or Other Creditor
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Notice of Intention To Appoint Administrators
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What Does Going Into Administration Mean?
Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners. The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. Company rescue as a going concern – this is usually a company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation. This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required. Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk. So communication with the secured lender is essential.
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What is Receivership?
Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control. When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership. These questions and answers will give more detailed background to the Administrative Receivership technique. If you have any further general or specific questions email us or complete the contact form. Q: How does it happen? A: Receivership can happen very quickly once the bank loses faith in the directors. The best policy is to work with the bank and produce a survival plan having taken professional and expert advice. Q: But the bank can't just appoint a receiver can they? A: Yes - read the terms of the debenture closely - you will be surprised how little power you have to prevent it. In truth the bank will generally have exhausted all possible avenues to help to try to preserve the business. If the directors are manifestly not up to the job or will not listen, will not take professional advice, they will lose patience quickly. Q: Can we stop them? A: Not normally. However if you talk to an experienced turnaround practitioner they can often persuade the bank that their involvement will lead to a review of viability followed by a professional recovery plan and the bank will usually give time for this to happen (within strict financial constraints) Q: How can we avoid receivership? A: Follow the guidance on this site. Discuss the problems with your key people. What caused them and how you can get round them. Build a plan for survival. Discuss this clearly with the bank. If in doubt about the correct route speak to a turnaround practitioner or a quality insolvency practitioner who lists rescue and recovery as a specialty. Be warned most are still looking for liquidations and receiverships (undertakers)If the bank wants to put investigating accountants in; wait until you have a built workable plan and then sell this HARD - to the investigating accountant.Above all demonstrate a professional and determined approach to saving a viable business - procrastinate at your peril - the bank will not wait for that silver lining. Q: I have heard that receivership is a rescue procedure - please explain? A: Many insolvency practitioners describe selling the business or its assets to a third party out of receivership as a rescue technique. Although some part of the activity may remain I cannot understand how the loss of almost all creditors' monies, jobs and all shareholders' funds, followed by the liquidation of the company, can be described as a rescue! Q: What happens if the receiver does not get the banks money back in full? A: He/she may rely upon the banks other securities. Obviously if the directors, shareholders or even a third party has signed a personal guarantee to pay money to the bank in the event of a failure to recover its loans, then the receiver pursues this as if it were an asset of the company. The receiver may also look at the possibility of legal actions against the officers of the company or debtors or creditors to recover funds Q: What happens to my personal guarantees in receivership? A: Unless the receiver recovers all loans due the bank after his/her fees (and any payments due to preferential creditors) then your PG will crystallise. In other words the receiver may seek to recover money from you. Q: What happens to the employees? A: This is a complex question that cannot be answered without a great deal of information. If the business is sold in a reasonable time then their employment rights can be continued with the new owners (under TUPE). If the receiver makes them redundant straight away they can claim for payments from the government (subject to a maximum amount). Again this is a complex question - email us if you want more detail.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.
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