In this blog, we’ll be letting you know some of the myths you might hear about insolvency. There are a lot of myths about insolvency, which often come from people will very little knowledge of the topic.

Myth 1: Insolvency means the end of your business

In some cases, insolvency can mean the end of your business as you enter liquidation, but not every time. Even if insolvency results in the end of your business, it doesn’t stop you from setting up another company doing the same thing in the same area. There are some guidelines you would need to follow if you were to open a new company, but insolvency doesn’t mean the end of your business.

Myth 2: Insolvency means that you’re a failure

That’s certainly not true. Insolvency means that the business that you set up as a limited company has become unable to pay debts when they fall due. This doesn’t mean that you’re a failure.

Insolvency can happen for a number of reasons, some of which are even out of your control. We’ve helped many companies that have become insolvent purely because they haven’t been paid. This is very little to do with the abilities of a director.

I myself was involved in a business that went into liquidation because the government changed the goalpost on something that we were doing. Unfortunately, the funding was withdrawn, which meant the business could no longer continue.

Insolvency does not mean you’re a failure, it’s just something that happens, and it happens to many people.

Myth 3: You can’t liquidate with a bounce-back loan, CBILs loan or Recovery Loan Scheme loan

Yes, you can. At 1st Business Rescue, we’ve been involved with hundreds, maybe even thousands, of jobs over the last few years where companies have liquidated with bounce-back loans. You can liquidate with one.

Those who will struggle to liquidate are those who did not spend the loan on what it was intended for. Read more about bounce-back loan fraud.

Myth 4: If you liquidate, you will be liable for the company’s debts

This is not always the case. In fact, in most cases, as long as you’ve behaved correctly as a director, the company’s debts will be written off when you liquidate.

This is a benefit of being a limited company, it provides you with limited liability and protection. It means that the company’s debts are not your personal debts.

Providing you have acted responsibly and have carried out all of your fiduciary duties, the limited company debts will go into liquidation, and you won’t be personally liable.

There are some instances where you might be held personally liable, such as if you’ve signed personal guarantees or if you’ve acted irresponsibly. Acting irresponsibly as a director may include you taking all the money out of the company or using the bounce-back loan for your personal benefit.

insolvency myths

Myth 5: Entering liquidation means that you’ll be banned from being a director

This is not the case. You can liquidate a company and be a director of a number of other companies. The only reason you could be banned from being a director is if your conduct is called into question on the company that you’ve liquidated.

More recently, more directors are being banned due to bounce-back loan and furlough fraud. The thing to remember is that the directors that have done something wrong are the ones being banned.

As long as you have acted responsibly, there is a very low chance of you being banned from being a director again. But remember that it does depend on your personal situation and conduct.

Myth 6: You will be made bankrupt if you liquidate a company

In 99% of cases, you will not be made bankrupt after liquidating your company. This is because a limited company gives you protection. So, even though the company may have accrued a number of unsecured debts, they aren’t your debts as a director.

There are circumstances where a director is made bankrupt as a consequence of a liquidation but not because of the liquidation.

An example of this: your business is insolvent, so you go into liquidation. As a director, you have signed multiple guarantees that you cannot settle or organise deals on. Eventually, you’ll be made bankrupt as a result of this.

When it comes to personal guarantees, 90% of the time, the institution you’ve signed with just want their money back. This means they’ll be more likely to organise deals with you. So, in 99% of cases, you won’t be made bankrupt.

Myth 7: It will affect your credit score if you liquidate

A limited company is not an individual; in fact, they have nothing to do with each other. If you liquidate a business, it’s not going to appear on your credit score. Even if you have signed personal guarantees for things like overdrafts, loans and suppliers, as long as you get deals sorted with these institutions, they have no reason to put anything on your credit file.

Myth 8: Liquidation only costs £2000

No liquidator in the UK charges £1500 – £2000 to liquidate a company. If that’s what they’re telling you, mark my words, there is a sting in the tail, and you can expect trouble later down the line.

The cost to liquidate a small company in the UK is around £4000 plus VAT. Remember, that’s only the headline figure. You may be pursued for things like misfeasance claims, preference payments, overdrawn directors’ loan accounts and problems with bounce-back loan spending.

We hope this blog has been helpful on myths about insolvency. Make sure that you seek professional advice if you are worried about insolvency and liquidation. We can talk you through the process and de-bunk all myths about insolvency. Contact a reputable and honest company like 1st Business Rescue for all director support and advice.

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I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle. I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.  I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:

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