When a company goes bankrupt, it means there is either no cash to pay bills or more liabilities than assets.
It can occur due to various factors, such as financial mismanagement, overwhelming debt, or an economic downturn. Once a person or organisation declares bankruptcy, its assets are typically liquidated to pay off creditors.
While it is a commonly used term, bankruptcy is correctly associated with individuals in the UK. Instead, a company is said to be insolvent.
In the UK, insolvency is governed by the Insolvency Act 1986Trusted Source – .GOV- Insolvency Act 1986, and the Insolvency (England and Wales) Rules 2016. The process is supervised by the Insolvency Service, a government agency, and must be handled by a licensed Insolvency Practitioner.
This article will focus on the specifics of insolvency in the UK and the process involved. We’ll cover the process of determining insolvency, how to close a limited company and the potential consequences for directors.
Is My Limited Company Bankrupt?
Many directors are aware of financial difficulty without being certain of actual bankruptcy or insolvency.
To actually determine if a company is insolvent, you’ll need to conduct a cash flow or balance sheet test.
A cash flow test means analyzing the company’s ability to pay its debts as they become due. If the company is unable to meet its payment obligations as they fall due, it is likely insolvent.
A balance sheet test involves analyzing the company’s financial position to determine if its liabilities exceed its assets. If the company’s liabilities exceed its assets, it may be insolvent.
Directors can also seek the advice of a licensed insolvency practitioner, such as ourselves, who can conduct a formal insolvency test on your behalf. The insolvency practitioner will assess the company’s financial position and provide a report outlining whether the company is insolvent and what steps can be taken to address the situation.
Professional advice is a must if you suspect you’ve crossed the tipping point. Directors often don’t realise that once this happens, their chief responsibility is no longer to shareholders but to creditors. Any actions you take from that point on must reflect that fact, or you could find yourself accused of wrongful trading further down the line.
We have created a handy insolvency test tool which you you can use to establish what state of financial distress you are in.
What Can I do if My Company is Bankrupt?
If you’re insolvent, cease trading immediately.
Don’t pay anyone, including yourself, and take careful notes of all your actions. Ensure you understand the risks around trading whilst insolvent.
In most cases, business insolvency will lead to liquidation of the company, but it may also be possible to try to rescue it via methods such as a company voluntary arrangement. To assess the best option you’ll need to seek advice from an insolvency practitioner.
These individuals, often accountants, are trained and regulated to deal with insolvent companies in the UK.
You should prepare accurate financial records for any conversation with an IP, detailing the company’s financial situation.
Liquidating a Bankrupt Company
Liquidating a bankrupt company, also known as winding up, is the process of selling off the company’s assets and using the proceeds to pay off its creditors. The process can either be chosen voluntarily by directors or imposed upon the company by the court due to non-payment of debts.
If chosen voluntarily, the process is typically overseen by an insolvency practitioner, whereas an Official Receiver handles the compulsory process.
Exploring the Bankruptcy Process for Limited Companies
The liquidation process typically involves the following steps:
- Inventory of assets: An inventory of the company’s assets is created, including property, equipment, inventory, and other assets.
- Valuation of assets: The assets are valued by an independent valuer to ensure they are sold at a fair price.
- Sale of assets: The assets are then sold, either through a public auction or private sale. The proceeds from the sale of assets are used to pay off the company’s creditors.
- Distribution of proceeds: After the assets have been sold, the proceeds are distributed among the creditors by the priority set out in the Insolvency Act 1986. Secured creditors, such as banks, are typically paid first, followed by unsecured creditors, such as suppliers and employees.
- Closure of company: Once the assets have been sold and the proceeds have been distributed, the company is officially dissolved, and the process of liquidation is complete.
What are the Methods for Rescuing a Bankrupt Company?
There are several methods for rescuing a bankrupt company, which include:
- Company Voluntary Arrangement (CVA): This is a legally binding agreement between a company and its creditors in which the company proposes a plan to pay off its debts over a period of time. CVAs are often used as an alternative to liquidation, allowing the company to continue trading while it repays its debts.
- Administration: This is a process in which an insolvency practitioner is appointed as an administrator to manage the company’s affairs to rescue the company as a going concern. The administrator may be able to restructure the company’s debts, negotiate with creditors, and sell assets to pay off debts.
- Pre-Pack Administration: This is a process in which a company’s assets are sold before the appointment of an administrator, and then the business is transferred to a new company owned by the same people. This allows the company to continue trading under new ownership without the burden of its previous debts.
What Does the Closure of a Bankrupt Company Mean for Directors
The closure of a bankrupt company can have significant consequences for its directors. Some of the potential consequences include the following:
- Loss of control: Once a company is in liquidation, the insolvency practitioner or official receiver appointed by the court will take control of the company’s assets and manage the liquidation process. Directors will no longer have control over the company’s affairs.
- Personal liability: In some cases, directors of a bankrupt company may be held personally liable for certain company debts. Insolvency practitioners have a duty to investigate directors’ actions in the period surrounding the insolvency; where it is discovered directors acted improperly, charges of wrongful trading may be bought, which can result in personal liability for some or all of the corporate debts.
- Disqualification: Directors of a bankrupt company may be subject to disqualification proceedings, which can prohibit them from acting as company directors. This can make it difficult for them to run a business in the future.
Company Bankruptcy FAQs
Are there alternatives to business bankruptcy?
Alternatives to business bankruptcy include debt restructuring, company voluntary arrangements and administration. These alternatives can provide a way for a company to pay off its debts and continue trading without going bankrupt.
Will I be able to continue working as a director after the company is bankrupt?
You can unless you have acted in such a way that you end up being banned from being a director.
What are my responsibilities as a director during the bankruptcy process?
A directors chief responsibilities are to avoid any actions that may prefer one creditor over another, and to cooperate with the insolvency practitioner during the information gathering phase. This may involve providing details about the company’s assets and liabilities.
How will bankruptcy affect the company’s employees, shareholders and creditors?
For employees, it may result in job loss and uncertainty about their future employment. Shareholders may lose their investments and may not receive any returns on their shares. Creditors may not receive full payment on their debts, and may have to write off a portion of the debt.
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 our standards for producing accurate, unbiased content in our editorial policy here.
- Trusted Source – .GOV- Insolvency Act 1986