When a company goes bankrupt, it means there is either no cash to pay bills, or more liabilities than assets.
If your small business is facing a bankruptcy situation, we can help. As experienced, fully licensed Insolvency Practitioners we can explain the options.
The first thing to do is to recognise business bankruptcy and that trying to continue trading, perhaps favouring some creditors over others, can create personal risks for you if you are a company director. If your business is insolvent, you should stop trading. After that, the best option usually is voluntary liquidation which is generally preferable to compulsory liquidation (where a creditor starts the process to wind up your company).
We specialise in advising company directors who are concerned about potential personal liability or risk. Many small business owners have given personal guarantees or have other concerns about events leading up to insolvency.
Below we’ll explain how to tell if you’ve reached bankruptcy, and what are your options if you have.
Company Bankruptcy: Definition
While bankruptcy is a commonly used term in the UK, it should correctly be used only to refer to individuals. While individuals go bankrupt, limited companies are liquidated. In practical terms, the terminology doesn’t really matter, though it can be confusing.
Insolvency is another term used for a company going bust. If your business is insolvent this doesn’t always mean it will be liquidated. In most cases it does but in some cases the business can be rescued. Despite the number of terms used to describe sever financial problems for businesses, the key test is whether your business :-
- Cannot pay it’s bills when due; and/or
- Finds itself in a position where its liabilities which will need to be paid in the forseeable future outweigh its assets
If you’re the director of a limited company that fulfills one of these two criteria, you’ll need to take advice immediately and stop trading. Insolvency represents a fundamental change in your responsibilities as a director and you’ll need to understand the rules.
What to do if your Business is Bankrupt
If you’re insolvent, cease trading immediately.
Don’t pay anyone, including yourself, and take careful notes of all your actions.
As the director of a bankrupt company, your primary responsibility is no longer to your shareholders, but to your creditors.
In most cases business insolvency will lead to liquidation of the company but in some cases it may be possible to try to rescue it via a company voluntary arrangement. To assess the best option you’ll need to seek advice from an insolvency practitioner.
Does business bankruptcy mean personal liability?
If your business operates as a limited company, it will be a separate legal entity which means that the starting point is that company directors and shareholder will have no liability for the company’s debts. The exceptions to this rule are :
- where personal guarantees are given for the company debts; and/or
- where directors have acted unlawfully, continuing to trade or otherwise breaching Insolvency Rules which create legal obligations for directors when they know or ought to know that the business is insolvent; and/or
- where directors owe money to the company having taken directors loans which the Insolvency practitioner may seek to recover as part of the liquidation.
If you do not trade as a limited company and are a sole trader or an unlimited liability partnership, your business is not separate from you and you wil be personally liable if the business folds.
What happens to Employees with Business Bankruptcy?
When a company becomes insolvent, employees become creditors for unpaid wages, holiday pay, and other outstanding amounts.
For some debts they are ranked as preferential creditors, and for others unsecured creditors. Read our full guide to employee rights in insolvency.
Redundancy Claims During Bankruptcy
The Redundancy Payments Service (RPS) administers claims for employees (including company directors) on the National Insurance Fund. This means you may be entitled to statutory redundancy pay even if you’re the director of a company that has gone into liquidation.
Avoiding your Company Reaching Bankruptcy
It is not unusual for small businesses to hover between solvency and insolvency for months or even perhaps a year or 2. Sometimes it is possible to turn around a business before it becomes clearly insolvent. Depending on your circumstances, there may be a number of options open to you, which we can help with. These typically include:
- Company Voluntary Arrangement (CVA)
- Alternative Finance – Solutions like invoice finance may allow enough improvement in the cash-flow cycle to avoid insolvency altogether.
- HMRC Time to Pay Arrangements
- Going into Administration
Can I be a Director After My Company has Gone Bankrupt?
The starting point is yes you can unless you have acted in such a way that you end up being banned from being a director.