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    Company bankruptcy

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    Company bankruptcy is a term commonly used to refer 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.

    Company bankruptcy is known as liquidation in the UK

    Though you may have heard stories of “companies going bankrupt”, this applies to US companies.

    In the UK, a company cannot “go bankrupt”, instead it enters liquidation. The most common insolvent liquidation is a Creditors Voluntary Liquidation (CVL) and is driven by directors and members or shareholders of the company. At the end of the process, the company ceases trading, is wound up and struck off the register at Companies House.

    There is also compulsory liquidation, which is a court-based procedure following a winding-up petition issued by one or more of the company’s creditors.

    Winding-up petitions can be issued after a company owes a creditor more than £750.

    Entering liquidation

    A company can enter liquidation when it’s solvent or insolvent; the status of the company will determine the liquidation procedure: Creditors Voluntary Liquidation for insolvent companies, and Members Voluntary Liquidation (MVL) for solvent companies.

    When an insolvent company enters liquidation, after all assets have been realised, a distribution of any proceeds is made to creditors. Any remaining debt will eventually die with the company as it ceases to exist.

    A solvent company would similarly realise all assets, repay all outstanding debts and liabilities, then distribute the residual monies to shareholders. Again, the company would cease to exist and would be struck off the register at Companies House.

    A liquidation procedure, whether solvent or insolvent, can only be entered and carried out by a licensed insolvency practice.

    A company is classed as insolvent when it can no longer pay its debts when they fall due, or where the value of liabilities and debts exceeds the total value of assets. Directors have a legal obligation not to continue trading when a company is insolvent, resulting in the creditors’ position deteriorating.

    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 if the company was forced into compulsory liquidation, and the 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.

    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.

    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.

    Avoiding liquidation

    If you run a company which you believe to be insolvent, you may want to continue to trade, and prevent company liquidation. There are processes available that will provide limited companies with a lifeline to enable them to recover.

    If you find out your company is insolvent, you should take action immediately. Failing to act can worsen your debts and increase creditor pressure, and ultimately make a director personally liable for a company’s debt.

    It may be something as simple as restructuring finances, but this is not a viable solution if the underlying problems have not been addressed.

    Repaying your debts

    Entering a formal payment plan, known as a Company Voluntary Arrangement (CVA) lets your company make affordable monthly repayments over a period of 5 years. This arrangement would be put in place by one of our insolvency practitioners. For this to work, the underlying core business needs to be viable, and it also depends on the co-operation of creditors.

    Administration

    Company administration can protect your company from creditors, while administrators effectively take control of the company. 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, refinance – or a combination. If all else fails, the company may be liquidated.

    company bankruptcy

    Personal bankruptcy

    Bankruptcy is an 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 process of bankruptcy 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.

    Alternative 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 house owner, possibly re-mortgage.

    An Individual Voluntary Arrangement (IVA) could be another solution. An IVA is a procedure which allows you to group all of your unsecured debt, and make 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, so if you wonder if it would work for your circumstances, contact us now for more information.

    More on personal and sole trader debt

    In summary

    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.

    How we can help

    If you are having difficulties meeting your financial obligations either in a company or as an individual, we can help. As a licensed insolvency practise, we can help you come to the right decision that enables you to settle your finances. Our initial advisors can offer you free, impartial advice with no obligation and our insolvency practitioners have years of experience to help you find the best solution.

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    Authored by Lisa Hogg

    Lisa Hogg

    Director & Licensed Insolvency Practitioner

    Beverley Horton Christopher Callaghan Stephen Hall

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