What Does Bankruptcy Mean for a Limited Company?

When a limited company is declared bankrupt, it means it is insolvent and unable to pay its debts as they become due.

It’s worth clarifying that while the term ‘bankruptcy’ is often used to mean generic financial failure, ‘insolvency’ is the correct term when referring to a business.

For a company, this situation can either mean closure via liquidation, or perhaps a business rescue mechanism such as a Company Voluntary Arrangement or Administration.

In the UK, the process is governed by the legal framework outlined in the Insolvency Act 1986, which details how insolvent companies are to be handled.

How things turn out depends largely on the company’s specific financial situation and the feasibility of a successful reorganisation.

What Steps Should I Take if My Limited Company Goes Bankrupt?

For a company facing bankruptcy, the essential advice for directors is to act decisively to mitigate further creditor losses. Begin with the following actions:

  1. Cease trading immediately to prevent the financial situation from worsening.
  2. You must hire a qualified insolvency practitioner to advise on the best course of action.
  3. Maintain accurate records of all decisions and actions taken after insolvency is recognised, to support transparency and accountability during future investigations.

Closure and Rescue Options for Insolvent Companies

If your company is insolvent, you have several courses of action available to you under UK law. These include closing the company voluntarily or working with an insolvency practitioner to try and turn the company around.

Either choice will depend upon the company’s likelihood of returning to profitability in the future, and the best course of action for creditors.

The liquidation process for a bankrupt limited company has the specific aim of winding up the company and distributing its assets to repay creditors.

It starts with the appointment of a liquidator, typically an insolvency practitioner, who is appointed to handle the closure

Once appointed, the liquidator takes control of the company’s assets, which are valued and sold. The proceeds from the sale are used to repay creditors, prioritising secured creditors first, followed by preferential creditors such as employees, and finally unsecured creditors.

After the assets are sold and proceeds distributed, the liquidator settles any outstanding claims and resolves disputes. The company is then formally dissolved, ceasing to exist legally, and any remaining debts are written off. This marks the end of the liquidation process.

Aimed at rescuing the company as a going concern, this process involves appointing an administrator to oversee the company’s operations and devise a plan to pay creditors while trying to save the business.

Going into administration isn’t practical for smaller companies, but is generally used when a business has an established presence and the potential to return to profitability in the future.

A CVA is a powerful business rescue process that allows the company to reach an agreement with creditors to pay a percentage of debts over a specified period, potentially while continuing to trade.

CVAs can provide a lifeline by giving the company time to restructure its finances without the immediate threat of liquidation. They must be proposed by a licensed insolvency practitioner and agreed upon by at least 75% of creditors.

Read our full article on company voluntary arrangement.

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What’s the Impact of Bankruptcy on a Company?

Bankruptcy not only causes employee redundancies but extends its impact to suppliers, clients, and the local economy.

Financially, bankruptcy typically results in significant losses, especially for unsecured creditors who typically recover only a small portion of what is owed to them. Secured creditors, while more likely to reclaim their investments, may still find the total financial recovery insufficient to cover all outstanding debts.

For directors and shareholders, bankruptcy is likely to have serious personal and professional consequences:

  1. Directors may face personal liability if found guilty of wrongful or fraudulent trading. This can include financial penalties and disqualification from holding directorial positions in the future. As part of their remit, the presiding insolvency practitioner must prepare a detailed directors’ conduct report.
  2. Shareholders often lose their investment entirely in bankruptcy, as shareholder claims are subordinate to those of creditors.

Legal Responsibilities During Bankruptcy

Here are the responsibilities of directors once bankruptcy is declared, designed to protect creditors and ensure that the insolvency process is handled appropriately:

Legal ResponsibilityImplication
Take steps to minimise losses to creditorsDirectors should act promptly to reduce the impact of insolvency on creditors, mitigating potential financial losses as much as possible.
Avoid wrongful trading chargesTrading while aware of insolvency can result in personal liability for directors if found guilty, leading to potential legal and financial consequences.
Cooperate fully with the insolvency practitionerDirectors are obligated to provide the appointed insolvency practitioner with access to all financial records and relevant information for the insolvency process.
Avoid preferential treatment towards specific creditorsDirectors must refrain from giving preferential treatment to certain creditors over others, ensuring fair treatment for all creditors involved in the insolvency process.
My company is going bankrupt – what are my options?

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Company Bankruptcy FAQs

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.

You can unless you have acted in such a way that you end up being banned from being a director.

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.

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.