Firstly: only individuals can go bankrupt - not companies!
If a partnership or company cannot pay its debts, as and when they fall due, it is classified as being insolvent. For guidelines on how to check whether your firm is insolvent, visit our page on the insolvency test.
A sole trader who is carrying on as a business can go bankrupt and in effect, the business ceases to trade. We do find that many businesses are still not incorporated when perhaps they should be. Yes, incorporation can mean additional paperwork but it will protect you from personal liability of all the business's debts. Unless of course you as a director trade wrongfully and fraudulently.
If you are a sole trader in the event of a very poor trading patch, you might think that as you cannot pay your bills then you have to go "bankrupt". However, this is where the IVA route comes in! It involves you agreeing to pay off debts over a period of time at an agreed percentage of the debt, as opposed to bankruptcy. However, the rules concerning bankruptcy are complex and each situation is different so you will need to take professional advice.
If the business is a company and is viable then you may continue to trade either in administration or using a company voluntary arrangement. Administration means that you will lose control of the business to the insolvency practitioner whereas a company voluntary arrangement you will not.
What is a CVA? This is where the company agrees to pay back its creditors over time, typically 3-5 years, while it continues to trade. The arrangement needs to be overseen by an insolvency practitioner as a supervisor. Visit our page on company voluntary arrangements if you think your company is viable.
Business bankruptcy, or its proper term, creditors voluntary liquidation (CVL):
If you feel that your business has no prospect of continuing then you must take action. If you are worried that liquidation would have all sorts of negative implications, then take a look at our pages on what happens after liquidation for worried directors. You are allowed to set up another company etc.
Download our comprehensive guide to creditors voluntary liquidation.
What is bankruptcy?
When you declare bankruptcy, you are ultimately passing over all control of your assets i.e. any financial debts. However, there are serious impacts of doing this, despite the initial catalyst of declaring bankruptcy being to have an easy way out of financial struggles.
How does business bankruptcy affect me, as a director?
This is a question we get asked a lot. It is a legitimate concern for any director who is having to watch their business go bankrupt. However, the effects on oneself are not as bad as expected, so long you act with ‘’reasonable care, skill and diligence’ and run the company in a fair, responsible and non-fraudulent manner.
Remember: just because the company goes bankrupt, say it goes into liquidation, administration or any other insolvency means, your personal credit rating will not be affected – as long as your company is limited. But, be aware that if you raise credit for another company which you are the director of, limited or unlimited, it will be flagged to share caution.
Being a limited company means the liability for anything within the company lies within the entity of the company, in comparison to running a unlimited company where the director and company fall under the same entity in the eyes of the law. This means those with unlimited liability will be at risk of personal loss in circumstances of bankruptcy. If this is the case then for any debts outstanding that cannot be paid, you will have to pay them and if they cannot be paid by money, then items which value that amount are at risk i.e. house.
Likewise, other situations when directors become liable for any debts of the company are as follows:
- Late payment of PAYE and NI payment
You have acted fraudulently or are guilty of wrongful trading
If you have personal guarantees. Find out more about this here.
Will it affect me getting a future job?
If you have been a director of a failed company and you are applying for a high profile 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.
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.
What should I do?
If you are worried about business bankruptcy, get in touch with us today We have a team of experienced and licensed insolvency practitioners who can oversee the situation and assist you in your options – which, to your benefit can involve rescue and not always just closure!
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert 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 and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.