Where to begin
Bankruptcy is a term used solely for individuals in the UK. Whilst it can apply to sole traders, it cannot apply to limited companies, so company bankruptcy is actually company insolvency, which must be addressed. If your limited company is no longer able to pay its debts or has debts and other liabilities which outweigh the assets it holds, it is classified as insolvent. Liquidating the business is not the only viable option to deal with an insolvent company, there are alternatives available if you are able to act quickly. At 1st Business Rescue, we can help guide you to the right path for you and your business.
What happens when a company is insolvent?
At the point of insolvency, the directors of the business are legally obligated to cease trading, however this will negatively impact the creditors’ position further. An insolvent company usually has to enter liquidation, and this will be via one of two routes:
1. A Creditors’ Voluntary Liquidation (CVL)
This occurs when the directors actively choose to enter the liquidation process and are therefore able to maintain some control. Debts will be repaid via a defined schedule and the company is able to appoint its own liquidators.
2. Compulsory Liquidation
This tends to occur when one or more of the company’s creditors issue a winding-up petition to the Courts. It basically forces the company into liquidation as a result of its financial predicament.
Upon liquidating, all the assets of the business will be sold or realised, and these will be used to pay off the debts outstanding. If there is not enough to cover them all, the remaining debts will ‘die’ with the company when it dissolves in full. There will not be any residual monies leftover, as had that been likely, the company would not have been declared insolvent. Once the company is liquidated, it will be removed (or struck off) from the official Companies House register. If the business and its closure was lawful, the directors are able to set up another limited company after the liquidation is complete, but it must be under a new trading name.
What are the director’s liabilities when a limited company liquidates?
The status of ‘limited company’ should be enough to protect the directors from having any personal liability for the debts incurred by the business. However, if there is any wrongdoing such as continuing to trade whilst insolvent, or wrongful trading has taken place, the directors might be liable. If any personal guarantees were signed to source funding for the business or there is an overdraft owing on a director’s loan, the directors can be liable for this too.
How can I avoid liquidation?
If you wish to continue trading even though your business is insolvent, there are some options available to you, but they must be followed closely. These options include:
Administration – this can protect your business from creditors whilst administrators take control of your business. An investigation will be conducted to see if all, or parts, of the business can continue trading viably. This could entail a pre-packaged sale, Company Voluntary Arrangement (CVA), refinancing or even a combination of them all. If none of these are possible, it may result in the liquidation of your business. Find out about liquidation vs administration here.
Repayment – this process will enable your business to set up affordable repayments to creditors over a five-year period and is known as a Company Voluntary Arrangement (CVA). This can only occur if the business is still a going-concern and will necessitate the agreement of the creditors to which the debts are owing.
If your limited company is facing insolvency, then get in touch with the experts at 1st Business Rescue. If we start the process early enough, there may be a way to prevent liquidation from happening. However, if liquidation is the only option, we will guide you through it the best way possible for your directors and business.