Worried about business debt and bankruptcy?

Or are you exploring whether a company that owes you money is going bankrupt?

We’ll explore both subjects below in our complete guide.

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limited company insolvency or bankruptcy

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, 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.

do you need to find out if a company is in financial trouble?
The government offers a service that allows you to check if a company is either in liquidation or provisional liquidation. Find it here: https://www.gov.uk/find-out-if-a-company-is-in-financial-trouble

When a Company 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.

Going bankrupt doesn’t necessarily mean you will go out of business, but it does represent a serious situation that has to be handled. Seek advice from an insolvency practitioner to figure out whether the situation can be turned around, or whether you’ll need to liquidate.

Going into Liquidation

If the company goes into liquidation then a licensed insolvency practitioner will need to be appointed. It is their job to oversee the liquidation process.

They will take control of the business and:

  • Settle any legal disputes or outstanding contracts
  • Sell the company’s assets and use the funds to pay the creditors
  • Make payments to creditors (in this order of priority)
  • Complete all the relevant paperwork
  • Pay the final VAT bill
  • Settle the liquidation costs using funds raised through the sale of company assets
  • Strike the Company off the Register at Companies House

At the end of the liquidation, the limited company will cease to exist.

What Happens to Employees

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.

Rescuing a Company from Bankruptcy

The insolvency of your business is not an untenable situation. Depending on your circumstances, there will be a number of options open to you, some of which offer the potential to rescue the business.

They include:

  • Company Voluntary Arrangement (CVA) – Formal negotiations take place with your creditors which, if successful, will allow interest and charges on outstanding debts to be frozen. A consolidated monthly payment plan will be put in place that allows you to pay all or part of the debts over an extended period of time, typically three to five years.
  • Alternative Finance – Solutions like invoice finance may allow enough improvement in the cash-flow cycle to avoid insolvency altogether.
  • HMRC Time to Pay Arrangements – We are experienced mediators with HMRC and can help you put forward the best possible case to increase the likelihood of them giving you time to pay.
  • Going into Administration – This rescue solution is appropriate for larger companies and involves temporary management and restructuring from an insolvency practitioner, whilst protected from legal threats by a moratorium.

Can I be a Director After My Company has Gone Bankrupt?

The simple answer is yes.

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.

Free confidential advice about your situation
If you’re concerned your company may be in trouble, please get in touch via the live chat, email info@companydebt.com or call 08000 746 757 to speak with an expert right now.