Updated: 16th February 2021
When a limited company goes bankrupt it means there is insufficient cash available to pay the bills as they become due, or that the value of its assets is less than its total liabilities, including those that may arise in the future.
Bankruptcy is a term used when an individual cannot pay their debts, however. When a limited company is in this situation, it becomes insolvent rather than bankrupt, but the terms are sometimes used interchangeably.
So what happens when a limited company becomes insolvent, and what should you do as a company director?
As soon as you know your company is likely to become insolvent you must take action in order to minimise the losses to creditors. Failing to do so can leave you open to personal liability for the company’s debts, so this is an important first step.
This may mean you need to cease trading with immediate effect, however, in some cases, it would be more beneficial for creditors for you to temporarily continue trading. This is a grey area, and the advice of a licensed insolvency practitioner is absolutely vital at this time to ensure you are not in breach of your responsibilities as the director of an insolvent limited company.
Seeking professional insolvency help will help you to objectively assess the situation as well as obtain advice on the potential options. Depending on the situation you might be able to rescue the business via formal debt restructuring, for example.
When a company is liquidated, a licensed insolvency practitioner (IP) takes control of the company, realises its assets, and distributes the funds to creditors. Because the company is a separate legal entity from its directors, you are protected from personal liability unless certain circumstances arise.
If you have provided personal guarantees for business borrowing, this can also lead to you being liable for the outstanding sum, for instance. During the liquidation process the office-holder carries out investigations into the company’s decline leading up to insolvency, and reports their findings to the Secretary of State.
But limited company bankruptcy does not necessarily mean the business is doomed to failure. Depending on the financial position of the company and its likely future viability, there may be options available to rescue the company and bring it back from the brink of insolvency.
Funding methods such as invoice finance and other asset-based funding channels an alternative to bank borrowing, and may be appropriate for your business.
HMRC Time to Pay arrangement (TTP)
If you are behind with your tax payments, HMRC may agree a Time to Pay arrangement that offers payment of the arrears in instalments.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement is a formal agreement to repay the company’s debts over time, and typically lasts between three and five years. Interest and charges are frozen, and any remaining debt at the end of the term may be written off.
Larger companies can benefit from entering administration, which is a process that provides a moratorium period when the administrator can formulate a plan without the threat of legal action against the company.
In some cases company liquidation will be the only choice available, in which case Creditors’ Voluntary Liquidation (CVL) is the preferred options. CVL places the interest of creditors first and allows the company to be brought to an orderly end.
If you are employed by your company as well as being a director, you may be able to claim director redundancy and other statutory entitlements in the same way as your staff members.
After an insolvent company has been liquidated and closed down, it is struck off the register at Companies House. As long as the liquidator’s investigation has found no wrongdoing, you are free to become a director of another company if you wish whether in the same or a completely unrelated field. There are restriction on setting up a new company with the same or a similar name, however, your insolvency practitioner will be able to advise you further on this.
For more information and professional guidance on limited company bankruptcy, please call one of our experts at Begbies Traynor. We can arrange a free same-day meeting, and work from offices throughout the country.