Company bankruptcy is a term commonly used when referring to company liquidation. In the UK, the term bankruptcy is only applicable to individuals, including sole traders and members of partnerships. For a limited company, a process known as liquidation would be the equivalent of company bankruptcy.
Whether you want to walk away from the business or wish to write off company debt and start again, we can advise you in plain, easy-to-understand language every step of the way.
Why would a company need liquidating?
A company is classed as insolvent when it can no longer pay its debts when they fall due, or the value of liabilities and debts exceed the assets’ total value. Directors have a legal obligation not to continue trading when a company is insolvent, and they must act in the creditors’ best interests to avoid their position further deteriorating.
If your insolvent company’s debts are so burdensome that recovery and repayment aren’t an option, you can choose to close the company by putting it into a Creditors Voluntary Liquidation (CVL). Doing so writes off all the company’s unaffordable unsecured debts and allows the directors to move on or start again afterwards.
It’s illegal to attempt to strike off an insolvent company, so to start a liquidation, you should contact us before your creditors take further action.
Failing to act means your creditors could seek to close your company by force via compulsory liquidation. A compulsory liquidation is a court-based procedure following a winding-up petition from one or more of the company’s creditors.
While “company bankruptcy” is known as liquidation in the UK, personal bankruptcy can be a viable option for individuals who owe at least £5,000 and cannot afford to repay their creditors. It can put your personal assets such as a house, car (or even business premises, if you own them personally) at risk. The bankruptcy process is similar to a company liquidation in that significant assets (house, car, etc.) are sold, and the proceeds distributed to your creditors. In most cases of bankruptcy, any remaining unsecured debts are usually written off after a year.
Putting your company into liquidation
If your company’s debts are of such a level that liquidation is the only viable option, you should speak to us as soon as possible. Our initial advisors will discuss the available options, reducing the risk of compulsory liquidation. If liquidation is your best option, and 75% of shareholders agree, one of our IPs becomes the proposed liquidator, and a proposal is pitched to your creditors. Once the liquidation commences, trading ceases, realising the company assets and employees are made redundant. An investigation is carried out into the directors’ conduct before and during insolvency.More on applying for a CVL
Help to avoid liquidation
If your company is insolvent, but repaying the debt is still possible, you may want to continue trading and prevent liquidation. There are processes available that will provide limited companies with a lifeline and help them recover. Failing to act can worsen your debts and increase creditor pressure, and ultimately make a director personally liable for a company’s debt.
- Repaying your debts
Entering a formal payment plan, known as a Company Voluntary Arrangement (CVA), lets your company make affordable monthly repayments over up to 5 years. Licensed insolvency practitioners carry out these arrangements. For this to work, the core business must be viable and depends on the cooperation of creditors.
More on Company Voluntary Arrangements
Company administration can protect your company from creditor pressure while administrators take control. This gives the insolvency practitioner enough time to assess whether the business (or parts of the business) could continue or be sold as a going concern. The administration could lead to a CVA, a pre-packaged sale, refinancing, or a combination. If all else fails, the company may be liquidated.
More on administration
Alternatives to personal bankruptcy
Bankruptcy offers no protection to personal assets, meaning you could lose assets like your home and car. There are other options to help repay your debts, which may, in some instances, help protect your assets. In some cases, you may be able to restructure your borrowing, or if you are a homeowner, possibly re-mortgage.
- Formal repayment arrangements
An Individual Voluntary Arrangement (IVA) could be another solution. An IVA is a procedure that allows you to group all your unsecured debt, making affordable monthly repayments over a period of up to 5 years. Any unsecured debt remaining at the end of the arrangement is written off.
An IVA can only be arranged through a licensed insolvency practitioner. Contact us now for more information and find out if this arrangement would suit your circumstances.
More on personal and sole trader debt
When a company can no longer meet its financial obligations, it is insolvent. If the business has no future, liquidation is a process to close the company. While you may be familiar with the term “company bankruptcy”, this applies to US companies and has a similar meaning to liquidation. In the UK, bankruptcy is only applicable to individuals. There are alternatives to liquidation, and you should act quickly to stand any chance at rescuing the company. Personal bankruptcy still exists in the UK and can apply to sole traders and individuals.
Company bankruptcy or company liquidation?
Though you may have heard stories of “company bankruptcy” or “companies going bankrupt”, this applies to US-based companies.
In the UK, bankruptcy relates to indebted individuals. A limited company cannot “go bankrupt”; instead, it enters liquidation. The most common insolvent liquidation is a Creditors Voluntary Liquidation (CVL), initiated by directors and members or shareholders. At the end of the process, the company ceases trading, is wound up and struck off the register at Companies House.
Can I liquidate a solvent, limited company?
A company can enter liquidation when it’s solvent or insolvent; its status will determine the liquidation procedure: Creditors Voluntary Liquidation for insolvent companies, and Members Voluntary Liquidation (MVL) for solvent companies.
As with an insolvent company, liquidating a solvent company similarly realises all assets, repays all outstanding debts and liabilities, then distributes the residual monies to shareholders. The company would cease to exist and would be struck off the register at Companies House.
More on Members Voluntary Liquidations
What happens to directors during liquidation?
If directors realise their company is insolvent, they should act immediately to avoid accusations of wrongful trading or trading whilst insolvent. Once directors decide to proceed with a CVL, it means they’ll have more control than being forced into compulsory liquidation, and creditor pressure will stop. As long as the directors haven’t partaken in wrongful trading and the company hasn’t traded while insolvent, they’re removed of all responsibility once the liquidation is complete.
Can directors be held personally liable?
Normally, a limited company’s limited liability protects its directors from being held personally liable for the company’s debts. If the director is found guilty of wrongful trading or the company has traded whilst insolvent, they could find themselves liable. The same applies if the director signed personal guarantees to secure business funding or if you have an overdrawn directors’ loan account.
More on personal liability for company debt
What happens after liquidation?
Once the liquidation concludes, the company’s remaining debts are written off, and if the directors have acted lawfully, they can set up a new limited company after the liquidation concludes. However, they can’t use the same trading name.
More about starting a new company after closing one
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