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. We also have a team of advisors who 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 who can no longer afford to pay their debts. While individuals go bankrupt, limited companies become insolvent.
Insolvency Means a business either
- Cannot pay it’s bills when due
- Finds itself in a position where its liabilities outweigh its assets
If you’re the director of a limited company that fulflls one of these two criteria, you’ll need to take advice immediately. Insolvency represents a fundamental change in your responsibilities as a director and you’l 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. You’ll need to ensure you’re not breaching any responsibilities, which could land you in hot water later on.
As the director of a bankrupt company, your primary responsibility is no longer to your shareholders, but to your creditors.
Whether you choose to liquidate the company and write off the debts, or to try to rescue it via a company voluntary arrangement, you’ll need to seek advice from an insolvency practitioner.
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.
The only restriction you face is that you cannot set up a new company with the same or a similar name as the old company. This is called ‘passing off’ and can lead to criminal action against you and personal liability for the debts of the new company if it enters liquidation.