Business bankruptcy is also known as insolvency in terms of company debts
In short, it is important to point out that only individuals can go bankrupt, not companies.
When a limited company is unable to pay debts when they fall due, this is known as falling insolvent. You can check if your company is insolvent from carrying out three tests, as explained on our page here.
But what is key, is that when a limited company is unable to pay its debts and falls insolvent it is separate to you, as a director, you do not become personally bankrupt. You are protected by the “veil of incorporation” that limits the liabilities of the directors for the company debts. You are seen as separate entities in the eyes of the law.
If you are a sole trader carrying on as a business and not incorporated, then you are seen the same legal entity meaning you can go bankrupt as well as your business, which will cease to trade.
Insolvency of a company can lead to liquidation
There are two types of insolvent liquidation; creditors voluntary which is started by directors and shareholders or compulsory which is started by the creditors who present a petition to the court.
When and why does a limited company go into liquidation?
So, a company goes into liquidation and becomes insolvent when it is either currently or likely in the near future, to be unable to pay its debts as and when they fall due and/or the value of assets is less than the sum of liabilities.
It is most vital that when you notice signs of impending insolvency, you try to reduce the amount of creditor liabilities. If you do not do so, then you could be accused of trading wrongfully ie making the creditors situation worse such that a reasonable person wouldn’t do.
What is the process?
Once you realise your business has no future and is facing linsolvency you must ACT. Take advice from a licensed insolvency practitioner. They have the role of supervising and overseeing the liquidation process. They take control of the business, settle any legal disputes, sell the company’s assets and use the funds from it to pay creditors and settle liquidation costs. They also are responsible for making creditor payments, paying the final VAT bill, completing necessary paperwork and striking the company off the register at Companies House. Consequently, the company will no longer exist.
Can a business be rescued from bankruptcy?
Depending on your situation, facing possible insolvency does not always mean the end of your business.
What options are available?
- Administration: when the insolvent company is put into the hands of licensed insolvency practitioners who temporarily manage and restructure the company whilst under a moratorium, to protect the entity from legal threats
- CVA: when the company agrees to pay back its creditors over a time period of normally 3-5 years, whilst continuing to trade
- Raising alternative finance: many solutions exists to help you with your finance such as invoice financing which could improve the cash-flow enough to avoid insolvency altogether
- Time to pay arrangement with HMRC
- The IVA route is appropriate for sole traders. This involves you agreeing to pay off debts over a period of time at an agreed percentage of the debt instead.
How does business bankruptcy affect me, as a director?
- Will I lose my house?
- Will I be personally liable?
- Can I be a director of a company after liquidation?
- What impact will it have on me getting a future job?
- What will happen to my credit rating?
These are all questions we get asked on many occassions. However, don’t panic. As long as you act with ‘’reasonable care, skill and diligence’ and run the company in a fair, responsible and non-fraudulent manner then there should be nothing to fear.
Credit rating: Your personal credit rating will not be affected in the case of a company insolvency. All that would happen is that if you raise credit for another company of which you are a director of, this situation will be flagged to encourage caution. Alternatively, if you are a sole trader, then you are seen as the same legal entity as the business, so if the business goes bankrupt, so do you. This will affect your credit rating.
Personal possessions: Only if you are a sole trader or have given personal guarantees are your possessions at risk. If you owe creditors as a sole trader whether they are suppliers or HMRC the debts are yours as you are the business. Creditors can make claims under a bankruptcy petition on your possessions including your house.
Future job: If you have been a director of a failed company and you are applying for a high level job in national security or finance then it is likely that it will be flagged in what would be called an enhanced credit check or a "vetting procedure". Whether it would stop you getting work is impossible to say as it would be at the discretion of the employer and how deep they look into your personal records and history.
Becoming a company director: Also, to note, whilst under the bankruptcy order, you cannot be a company director, and are unable to manage, form or promote a limited company without permission by the court. As soon as this order is complete, of which is normally no more than 12 months after being made, you are free to become a company director again.
If your business starts to grow and you are beginning to take on credit, then you should become incorporated i.e set up a company that is the legal entity in which the business is conducted. Yes, there are a few more administrative tasks to do but if you get a good accountant then this should not be too much of a burden. A limited company is designed to protect you from bankruptcy in case things go wrong. Why take the risk!
So, all in all, if you are concerned about business insolvency or bankruptcy, get in touch with us today and allow us to help you out. Our experienced and licensed insolvency practitioners would be delighted to help and assist you in your options.
Worried about poor cashflow? Feel you have got into a bit of a mess? Covid-19?, How to pay wages on pay day? For reassuring advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions. A new 20 day moratorium for distressed businesses has also been introduced.