Facing Business or Company Bankruptcy – What Are The Options?

What is Company Bankruptcy?

The term “company bankruptcy” is most usually heard in relation to companies in the USA.  Under Chapter 7 of the U.S. Bankruptcy Code, the company stops all operations and goes completely out of business. A trustee is appointed to liquidate (sell) the company’s assets, and the money is used to pay off debt.  Only individuals in the UK go bankrupt whilst companies go into what is termed liquidation.

When should you consider company liquidation?

So, if your company is insolvent and is no longer viable then the correct procedure is a creditors voluntary liquidation.  The directors decide that the business has no future and cannot pay its creditors. The directors then convene a meeting of the company’s shareholders, who pass a resolution to place the company into liquidation and appoint an Insolvency Practitioner to act as the liquidator.

What is the process of putting a company into liquidation?

1. Board Meeting: The directors convene a board meeting to assess the company’s financial position and determine if it is insolvent. If they agree that CVL is the appropriate course of action, they will pass a resolution to initiate the process.
2. Appointing an Insolvency Practitioner: The directors must appoint a licensed insolvency practitioner (IP) to act as the liquidator. The IP’s primary responsibility is to oversee the liquidation, realize the company’s assets, and distribute the proceeds to the creditors.
3. Shareholders Meeting: Usually just before the creditors’ meeting where the shareholders agree to place the company into liquidation
4. Creditors’ Meeting: The IP will convene a creditors’ meeting, typically within 14 days of the board meeting, to inform the creditors about the company’s financial position, the proposed CVL process, and to seek their approval. At this stage the creditors get to see what is termed an estimated Statement of Affairs (SofA).  This document sets out what the position of the company is, what it owes it creditors and whether there is likely to be any dividend paid out. Using the deemed consent process there is no need for an actual creditors meeting.  Notices go out about the proposed liquidators and if no objections are raised within 14 days, then the liquidation process starts.

Bear in mind that if you do not act promptly then you will find that your creditors will force you into liquidation.  This is what is termed compulsory liquidation and it starts when a creditor issues a winding up petition.  This is a court based procedure and is generally riskier for directors and is more hassle and stress as the process can take upto a year.

Personal Bankruptcy

If your business is not being conducted via a company, i.e you are a sole trader or a partnership, then you will need to go bankrupt, if there is no prospect of you being able to pay your creditors (owed more than £5000). This option places personal assets, like homes, vehicles, or even personally owned business properties, at risk. Similar to company liquidation, personal bankruptcy involves selling off assets and allocating the proceeds to creditors. Typically, after one year, most remaining unsecured debts are discharged in a bankruptcy case.

Bankruptcy: The Process

There are three different ways that bankruptcy can be initiated under the current legislation.

1. A Debtors petition to the court.
2. A Creditors petition to the court.
3. The supervisor of an individual voluntary arrangement petitions the court.

If you have considered all the above please ensure that you gather together all available information with regard to your personal and business financial circumstances. Put together a file of information all in one place to include: all legal actions against you, copies of any accounting information, copies of any financial plans and business plans, copies of business and personal creditors statements and a list of all of your assets.

The Process of Bankruptcy

A Debtor Petition

Visit your local County Court to pick up a debtors petition pack. The Court may charge for this, although court workers are usually helpful and can assist you fill out the form. The form is complicated, so ask the court officer who delivered it to you.

Provide all required information and return the completed form to the court with the filing fee. A debtors petition asks the court to convene a bankruptcy hearing. This isn’t as scary as it sounds, and the Court is sympathetic.

We recommend the debtor file bankruptcy if it’s their only option. This crystallises and relieves pressure. Doing it oneself costs creditors less.

A Creditor Petition

If a creditor can establish debt, they can file for bankruptcy. This usually involves a County Court Judgement or Statutory Demand served on the debtor.

The creditor may have tried to reclaim funds with a warrant, bailiff, or sheriff.

If there are outstanding obligations, the Inland Revenue / VAT may take this action. If so, please contact us because there are other options outside bankruptcy, unless the firm is unviable.

If the debtors petition is too expensive or you cannot pay it, you can wait for a creditors petition. This shows the court and creditors that you were ignoring them, so we don’t suggest it. Although this may not be accurate, this is the perception. Allowing a creditor to petition the court will grant the hearing and they may make you bankrupt in your absence.

Supervisor Petition

Please contact us if your IVA is failing or under pressure. We can help you restructure or replace the IVA, but you must show viability and a basis for noncompliance.

The supervisor usually petitions for bankruptcy if an IVA fails. This may be due to your failure to make regular IVA payments, provide information, or comply with the general rules.

The supervisor will usually give an abort certificate to show you and the creditors that the IVA failed before starting this procedure. He or she may have written to you multiple times begging for the voluntary agreement to be followed.

Please contact us again if you have ignored all these difficulties and still think the business is viable or that an IVA would be better for you. Please explain why you ignored all this contact!

The Hearing

Court officials will schedule a hearing after receiving the petition. This can take one to two weeks depending on Court time.

At the hearing, the court will review the statement of affairs and your or creditors’ documentation and order bankruptcy.

The Official Receiver usually serves as bankruptcy trustee. Insolvency practitioners (IPs) may be appointed bankruptcy trustees by the Official Receiver or the court if there are sufficient assets.

The Official Receiver will then interview the debtor to verify documentation and income and finances. If there are considerable assets, an official receiver may appoint a local insolvency practitioner as a bankruptcy trustee. The IP will reclaim such assets for creditors over time.

Also a good bit of advice, always make notes (or minutes) of meetings, telephone conversations and discussions with creditors. Date them and make sure that you save or file them safely. This will act as a good record if things become difficult in the next few weeks and months.

It is also important to draw up a very basic statement of affairs which compares your assets against your liabilities.

We would thoroughly recommend obtaining professional advice before deciding finally upon bankruptcy. For assistance please do call us on 08009700539 or e-mail us. Alternatively, contact any local insolvency practitioner; you can find one in the Yellow Pages.

Only cease trading when it becomes impossible to continue through cashflow pressure or when you have taken professional advice. It may be that the situation that has brought this to a head can be dealt with through an IVA or an informal deal with creditors and it is important to keep all avenues open until profession advice has been taken.

Alternatives to Liquidation or Bankruptcy

For individuals, or partners, the alternative is what is called an Individual Voluntary Arrangement.  This allows a proportion of the debt to be paid off over a 3-5 year period.  The creditors need to agree to this by a 75% majority by value.

For companies the alternatives are administration or a company voluntary arrangement.  Read our extensive guides on these rescue mechanisms.