Kevin McLeod
Written By Kevin McLeod
Licensed Insolvency Practitioner
July 24th, 2023

Running a business comes with no guarantees of success. Statistics show that 20 percent of small businesses fail in their first year, 30 percent fail in their second year and 50 percent fail after five years.

A Guide to Insolvency

If it happens the worst thing you can do is bury your head in the sand. You need to look clearly and calmly at the situation, take professional advice, and then deal with things efficiently. We’re here to help.

The truth is that if you choose to run your own business, you have to make peace with the fact that failure is a very real possibility, and it may happen for reasons completely outside your control.

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Our mission is to help company directors find the best possible solutions to insolvency. Whether you want free advice, or assistance with a formal insolvency procedure, make contact by calling 0208 444 3400 or try the live chat during working hours.

Insolvency Rather than Bankruptcy

The correct term to describe a business that can no longer afford to pay its debts is ‘insolvent’ rather than ‘bankrupt’. The business enters insolvency and has several routes it can take to attempt to rescue the business or close it down, depending on the specific circumstances it faces.

Bankrupt is the term used to describe private individuals who can no longer afford to pay their bills. They enter bankruptcy to seek relief from all or some of their debts and to make a fresh start.

However, distinguishing between insolvency and bankruptcy is not quite as clear cut as that. Businesses that are sole traders and partnerships become bankrupt, rather than insolvent. That’s because there’s no distinction between the owner of the business and the business itself. Their finances are one and the same, so if the business goes bankrupt, so does its owner.

That’s one of the main reasons why so many business owners choose to ‘incorporate’ their businesses. Incorporation is the process of turning a sole trader or partnership into a limited company. Limited companies are separate legal entities from their owners. The business will have its own bank account, assets and cash that are completely separate from its owners. In that case, if the limited company becomes insolvent, the personal finances of the business’s owners should not be affected.

Understanding Your Options When a Limited Company is Bankrupt

A limited company is said to be insolvent when:

  • It cannot pay its debts when they become due; and/or
  • The value of its assets is less than its total liabilities (the money it owes); and/or
  • It has outstanding statutory demands for payment for unanswered court orders or county court judgements (CCJs).

If any or all of these statements apply to your company, there’s a good chance it is insolvent. If you’re not sure whether your company is insolvent, please contact us for advice.

What Happens if a Company Declares Bankruptcy?

If you believe your company is insolvent, your responsibilities must shift entirely. Rather than running the business in the best interests of the company’s shareholders i.e. by generating a profit, you must act to maximise the interests of your creditors. That means, rather than accruing further debts, you must do everything you can to limit creditor liabilities. Usually, that means ceasing to trade and seeking professional help immediately. If it’s found that you did not act in the best interests of your creditors while running an insolvent business, you could be made personally liable for the company’s debts and even be banned from operating as a company director for up to 15 years.

Does Company Bankruptcy Mean Going out of Business?

If your company is insolvent, it doesn’t necessarily mean your business will have to close. Many businesses have fought their back from insolvency and gone on to be successful. The first course of action for the director of an insolvent business should be to explore whether it’s possible to rescue the business. The options available include:

  • Alternative finance – Although your business’s financial position is likely to mean you can’t access traditional funding streams such as bank loans and overdrafts, other forms of finance such as asset-based lending and invoice finance may still be available.
  • HMRC Time to Pay Arrangement – If your business has tax debts it’s unable to pay, it is possible to make an arrangement with HMRC to pay the money you owe in instalments. That could give you the time and space you need to trade your way back to profitability.
  • Company Voluntary Arrangement (CVA) –  A CVA is a formal agreement with your creditors that freezes interest and charges on outstanding debts. It allows you to put a consolidated payment plan in place to pay all or part of the money you owe over a typical period of three to five years.
  • Administration – Entering into administration is a company rescue solution that’s better suited to larger companies. An insolvency practitioner will take control of the business temporarily and attempt to return it to profitability. If that fails, they could sell all or part of the business to achieve the best possible result for its creditors.

Alternatively, if a company director has no desire to continue running the business or there’s no realistic prospect that a rescue will be successful, the company could be placed into liquidation and closed down. The company will enter into a Creditors’ Voluntary Liquidation (CVL) and an insolvency practitioner will be appointed to take control of the business and manage the liquidation process. They will:

  • Settle any legal disputes or outstanding contracts
  • Collect any payments due
  • Sell the company’s assets to repay its creditors
  • Distribute the funds to the creditors
  • Complete the relevant paperwork
  • Pay the final tax bill
  • Settle the liquidation costs using funds raised from the sale of company assets
  • Close the business down

What happens if I Liquidate my Limited Company?

Voluntary liquidation might seem like an absolute last resort, but there are some very important benefits associated with the process. A Creditors’ Voluntary Liquidation will allow you to close down your company quickly and professionally. You can then draw a line under it and become the director of another company as soon as the process is complete – although you will not be able to operate using an identical or similar name.

If you have been compliant with the relevant regulations while operating as a director and have been on the payroll for a number of years, you may even be able to claim director redundancy pay, which could help to pay for the liquidation and soften the financial blow.  

Your conduct while operating as a director will be investigated by the liquidator. However, as you have entered into liquidation voluntarily, you will not face the same level of scrutiny as you would if the company had been forced into liquidation by a creditor (compulsory liquidation). 

Upon completion of the liquidation, the company will be struck off the Companies House Register and it will cease to exist. Any debts which could not be repaid through the sale of company assets will be written off unless a company director had signed a personal guarantee. 

Are Directors Liable for Debt in a Limited Company?

Ordinarily, no. In the vast majority of cases, the directors of a limited company are not personally liable for its debts thanks to the protection provided by limited liability. That means assets such as cars and properties you own personally will not be at risk. However, there are a number of things you may have done while running the limited company that could make you personally liable for its debts. That includes: 

  • Signed a personal guarantee

It’s not unusual for a business owner to provide a personal guarantee on a loan or another finance agreement, particularly if the business has struggled to secure funding. If that company later becomes insolvent and there’s not enough money to repay the loan following its liquidation, a director could be made personally liable for that debt. 

  • Used personal property to secure a business loan

If you have a business loan that you cannot repay following the liquidation of your company, then the property you secured the loan against could be at risk. The best-case scenario is that the liquidation process raises sufficient funds to pay off the loan in full. However, that’s not always the case. If you do plan to take out a secured loan, we’d always advise you to provide expendable business assets such as equipment, inventory and future invoice payments as security, wherever possible. 

  • Owe the company money

It is not uncommon for the directors to take money out of the company in the form of a director’s loan. As long as the money is properly accounted for and repaid then this is something they are perfectly entitled to do. The problem comes when the company becomes insolvent and the money has not been repaid. In this case, as part of the liquidation, the insolvency practitioner will ask for all outstanding sums to be repaid. If you are unable to repay the money from your personal funds, the liquidator could decide to take legal proceedings against you which would put your personal assets at risk. 

  • Are guilty of misfeasance, or wrongful or fraudulent trading

During the liquidation, the insolvency practitioner (liquidator) will investigate the actions of the current and former directors in the three years prior to the insolvency. If they find examples of misfeasance (the misapplication of company funds or property), wrongful trading or fraudulent trading, the directors involved could be held personally liable for some or all of the company’s debts.  

Can Bailiffs take goods from a limited company?

If a creditor has repeatedly tried to recover a debt without success, they may employ the service of a bailiff or an enforcement officer to collect the debt on their behalf. If you are unable to pay the debt in full, the bailiff is entitled to take goods from your limited company to sell to recover the money for your creditor. However, they must have the correct authorisation to do so, which is either a Writ of Control or a Warrant of Execution. That empowers them to take control of goods to cover the cost of the debt along with any interest that may have been added, as well as the bailiff’s fees. 

For a limited company debt, bailiffs can only take items that belong to the company. That includes stock, money, office equipment, vehicles and machinery. They cannot take items that are leased or on hire-purchase deals.  

A few important points to remember, include:

  • You should receive notice in advance that a bailiff is going to call.
  • If your business owes tax, a court order is not necessary before a bailiff can visit your property to seize goods.
  • If you operate a limited company and have not signed a personal guarantee for the outstanding debt, the bailiff can only take goods that belong to the company.
  • HMRC enforcement officers collecting tax debts can force entry to your business with the court’s permission.
  • County court bailiffs and High Court Enforcement Officers can also force entry into a business premises.

How Much Does it Cost to Close a Limited Company?

The cost of closing an insolvent limited company is greater than shutting down a solvent company, simply because the process is more complicated and time-consuming. Typically, the cost of closing an insolvent company via a Creditors’ Voluntary Liquidation (CVL) will start at around £5,000.

A solvent company that’s no longer trading and has few assets can be struck off for just £10. It may be more cost-effective to close a solvent limited company by way of a Members’ Voluntary Liquidation (MVL), which will cost upwards of £1,500.  

Are you Worried Your Company Could be 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.