People search for “company bankruptcy”, and we know what they mean. But a limited company does not go bankrupt. Bankruptcy is a procedure for individuals. A company becomes insolvent, and then enters liquidation, administration, a company voluntary arrangement or another formal procedure.
The distinction is not pedantry. The procedures, the thresholds, the paperwork and the consequences for you personally are all different, and advice written about personal bankruptcy will mislead you if your problem is a company. This guide explains what actually happens when a UK limited company becomes insolvent, and what it means for the people running it.
What Happens When a UK Limited Company Becomes Insolvent?
A company is insolvent when it cannot pay its debts as they fall due, or when the value of its liabilities exceeds its assets, taking into account contingent and prospective liabilities. Those are the two tests in section 123 of the Insolvency Act 1986, and a company can meet one without meeting the other. No court “declares” a company bankrupt. What usually follows insolvency is a formal procedure, most often liquidation or administration.
In liquidation, the company’s assets are sold off to repay creditors. The company ceases to operate and is eventually struck off the Companies House register. During administration, an appointed administrator seeks to rescue the company, restructure its debts, or sell the business to pay creditors.
For company directors, this is the point at which the job changes. You are not personally liable for the company’s debts merely because you are a director, and that remains true in most cases. What changes is who your duties are owed to: once the company is insolvent, or insolvency becomes probable, you must consider the interests of creditors as a whole.
Insolvency does not automatically mean you must cease trading that day. There is no rule to that effect. What you must do is protect the company’s assets, avoid worsening the position of creditors, and stop incurring liabilities you have no reasonable basis to think can be met. Whether continuing to trade is appropriate depends on the facts: whether there is still a realistic route out, whether trading on is likely to increase the deficiency, and what you are doing about it. That assessment is urgent and it should be made with professional advice, not alone.
Understanding Your Options When a Limited Company is Insolvent
When your limited company in the UK faces bankruptcy, understanding the available options is crucial to making informed decisions. These options primarily revolve around resolving the company’s insolvency and addressing its debts. Here’s an overview:
1. Liquidation: This is often the route taken when a company can no longer continue its operations. The process involves appointing a liquidator to sell the company’s assets and distribute the proceeds to creditors. There are three types of liquidation: compulsory (initiated by creditors), creditors’ voluntary (initiated by directors), and members’ voluntary (for solvent companies).
2. Administration: If there’s a viable business to save, entering into administration might be the best option. An administrator takes control of the company to either rescue the business, achieve a better result for creditors than immediate liquidation, or sell the assets. This process provides a degree of protection from creditors.
3. Company Voluntary Arrangement (CVA): A CVA is an agreement between the company and its creditors to pay debts over time. It’s a flexible tool that can provide breathing space and allow continued trading while addressing debt issues.
4. Refinancing or Restructuring: Sometimes, restructuring the company’s debt or refinancing can provide a solution. This might involve negotiating new terms with creditors or securing new funding sources.
Seek Professional Advice: Given the complexity of bankruptcy and insolvency, it’s vital to seek professional advice. An insolvency practitioner such as ourselves can guide you through the options and their implications, helping you choose the most appropriate course of action for your specific situation. Remember, the chosen path can have significant consequences for the company’s future, creditors, and your position as a director, so careful consideration and expert guidance are paramount.
What Happens When a Company is Liquidated?
If a limited company in the UK is liquidated, the process involves closing down the business, selling off its assets, and paying back creditors as much as possible. Here are the key steps:
- Appointment of a Liquidator: A professional (an insolvency practitioner) is chosen to handle the liquidation process.
- Stopping Business Operations: The company stops all its business activities.
- Selling Assets: The liquidator sells the company’s assets to raise funds.
- Paying Creditors: The money from the sale is used to pay off the company’s debts, starting with secured creditors and then unsecured ones.
- Investigation of Company Conduct: The liquidator checks the company’s past activities and the directors’ conduct.
- Dissolution of the Company: Once the assets have been realised, distributions made in the statutory order of priority and the liquidator’s work completed, the company is dissolved and removed from the Companies House register. In an insolvent liquidation creditors are rarely paid in full, and any shortfall remaining when the company is dissolved is not recoverable from the company.
During this process, directors need to cooperate with the liquidator and might face legal consequences if they’ve acted improperly. Once liquidated, the company no longer exists.
Does Insolvency Mean Going Out of Business?
Not always. An insolvent company can sometimes be rescued, and the earlier the position is confronted the more options remain open. Here are the routes most often used:
- Company Voluntary Arrangement (CVA): This is an agreement between the company and its creditors to pay back a portion of the debts over time. It allows the company to keep trading while making more manageable debt payments.
- Administration: A company can go into administration, where an appointed administrator takes over the management. The goal is to restructure the company’s debts, improve its financial health, and either sell the business or return control to the directors.
- Refinancing: Sometimes, securing new financing or restructuring existing debts can provide the company with the capital it needs to continue operating.
- Sale of the Business: In some cases, selling the business as a going concern is a viable option. This can mean selling the entire business or just parts of it to pay off debts and keep the company running.
It’s important to note that rescuing a bankrupt company is complex and not always possible, depending on the extent of its financial difficulties and the viability of its business model. Directors should seek advice from insolvency practitioners or financial advisors to explore the best course of action.
What Steps Should I Take if My Limited Company Is Insolvent?
If your limited company in the UK is facing bankruptcy, as a director, there are immediate and important steps you should take:
- Review whether to keep trading: Insolvency does not automatically require you to stop trading, but it does require you to stop and think. Trading on can increase your exposure where it worsens the position of creditors, so take advice quickly and be careful about incurring new credit or taking customer deposits in the meantime.
- Seek Professional Advice: Consult with an insolvency practitioner, such as ourselves at AABRS® , at the earliest opportunity. We can provide expert guidance on your situation and the most appropriate course of action.
- Gather Financial Paperwork: Assemble all financial records, including bank statements, invoices, and accounts. This information is crucial for the insolvency practitioner to assess the company’s position accurately.
- Keep Detailed Records: From this point forward, maintain meticulous records of all decisions and actions taken. This is important for demonstrating responsible management during the insolvency process.
- Avoid Preferential Payments: Be cautious not to pay off certain creditors in preference to others. Such actions can be reversed during the insolvency process and can also have legal implications.
These steps are critical in managing the situation responsibly and mitigating potential negative consequences for yourself and the company. Acting promptly and with professional guidance can help navigate this challenging situation more effectively.
Professional support if your company is insolvent
If you have concerns that your company could already be insolvent, we are on hand to discuss any of the issues raised in this guide and answer your questions. Please get in touch today for a free, no-obligation consultation with a member of our specialist corporate insolvency team.