Companies do not go bankrupt but individuals do!
A company or partnership that is unable to pay its debts, as and when they fall due, is classified as insolvent.
If it is really too late, or the business has suffered a severe downturn in its business and profitablity, then liquidation may be the answer or more accurately creditors voluntary liquidation.
However all is not lost. Here is a scenario;
Your biggest and best customer has not paid its latest bill and you find out that they have had a difficult time and have gone into administration. Generally in an administration you are unlikely to see much of the money owed to you as an unsecured creditor. This failure can lead to the "domino effect", if you like, where all suppliers to the company are in a difficult situation. Of course, many businesses would like to have a spread of customers, so diversify the risk, but this is not always easy.
In this event you might think that as you cannot pay your bills then you have to go bankrupt. This is not the case. If you are a sole trader or a partner in a partnership then you could consider the IVA route as opposed to bankruptcy. The rules concerning bankruptcy are wide and complex and every situation is different so you will need to take professional advice. For a guide on what partners in a firm need to look at then refer to our partnerships guide.
As a director of a company you are protected to an extent from incorporation or limited liability. However if you do not act reasonably or illegally in an insolvency situation then the veil of incorporation may be lifted and you could be pursued personally for the debts. Please refer to our webpage on directors.
So what are the options? If your business is viable going forward then a company voluntary arrangement (CVA) might be for you. This is where the company agrees to pay back its creditors over a time frame of typically 3-5 years while it continues to trade. This needs to be overseen by an insolvency practitioner as supervisor. We have more guides on this process than any other website so visit our page on company voluntary arrangements if you think your company is viable.
Company Bankruptcy or its proper term creditors voluntary liquidation (CVL)
If you feel that your business has no prospect of continuing then you need to take action. If you are worried that liquidation would have all sorts of negative implications, then take take a look at our pages on what happens after liquidation for worried directors. You will be allowed to set up another company!
There are 5 Simple Steps to liquidate your company:
Step 1 Find a Liquidator. Only licensed insolvency practitioners (IP) can liquidate a company. IPs have additional insurance for work carried out.
Step 2 Then a meeting will be arranged with the IP or his manager. At this meeting details are expected to be given of the company assets over to the proposed liquidator. These assets may then be valued if necessary. This is called the directors and shareholders meeting. In this meeting you will sign the forms to commence placing the company into liquidation. You are still a director for 2-3 more weeks, but you will find the pressure starts to ease dramatically, after KSA (or the IP) writes to all creditors.
Step 3 You will need to share how much you owe. KSA Group will get in touch with all of them to let them know what is happening and tell them that a creditors meeting will be held. This will quickly remove creditor pressure from YOU and they will start talking to KSA's liquidators and their staff instead!
Step 4 Give all company accounting information and (later) the books and records, as well as any information the IP requests. This is all needed to liquidate your company. It allows the necessary reports for the creditors to be prepared.
Step 5 Around 2-3 weeks later there will be a formal creditors meeting company. The director needs to "chair the meeting of creditors". The liquidator will run the meeting but you or one of your directors must attend it by law. The meeting of creditors is usually a simple short meeting with no one attending. Creditors tend to vote by fax or proxy.
At this meeting your duties as a director END. You will have to respond to any requests for information from the liquidator after this meeting.
Remember you have a duty to act according to the law and the position you are in. Many directors don't take action thinking that another sale, another contract, another payment will save their business - it probably won't.