What does it mean when a company is bankrupt?

Below we explore what it means, how it affects the directors, and whether investors should expect to get their money back.

While bankruptcy is a commonly used term, the correct term within UK law is actually insolvency, with bankruptcy applicable to individuals.

What is Company Bankruptcy?

A company is bankrupt when it cannot pay its debts, or when its liabilities outweigh its assets on the balance sheet. Bankruptcy is a legal state of affairs for which UK insolvency law provides several solutions.

One of these is liquidation, whereby the bankrupt company closes, with assets liquidated for tbe benefit of creditors. Various corporate rescue methods are also available. Going into administration is one of these, allowing for a period of restructure which protected from legal action by creditors.

[1]GOV:UK “Apply for Company Strike Off

What Happens if a Company Declares Bankruptcy?

When a company recognises it’s insolvent, a crucial shift happens in its responsibilties. It can no longer act in the best interests of its shareholders under UK law: it must prioritise creditor interests. As such declaring bankruptcy requires the services of a licensed insolvency practitioner. These individuals, often accountants who have received further training, understand the options available to bankrupt companies and are licensed to either liquidate or attempt a rescue process.

At the point of bankruptcy, directors powers cease while the insolvency practitioner takes over creditor communication, and prepares a Statement of Affairs document to summarise the financial position. They will the sell assets and distribute proceeds to creditors in order of priority or, if a rescue is underway, commence restructuring.

Can a Company Survive Bankruptcy?

Bannkruptcy means that intervention is necessary but it doesn’t necessarily mean the end of the company. For example, a company may be bankrupt on the balance sheet but be able to use finance to borrow money until the company returns to profitability. Another option is that the company may be placed into administration and then sold, meaning the company itself survives: this is a common tactic with football clubs.

For the insolvency practitioner overseeing the case, the key issue lies in establishing whether the company is still viable. This means does it have a future? Can I rise again from the ashes and become a profitable entity? If the answer to this is yes then there are several methods of corporate rescue by which financial challenges can be overcome for the overall best interests of creditors.

References

All Company Debt insolvency content is written by our licensed insolvency practitioners.

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy here.

  1. GOV:UK “Apply for Company Strike Off