What Happens If a Limited Company Goes Bankrupt?

A limited company can go bankrupt if they don’t have enough cash to settle bills when due, or if the value of the company’s asset is less than its overall liabilities, including the ones that may come up in the future.

However, I need to clarify some terms first.

Bankruptcy and insolvency are sometimes used interchangeably but they apply to different things.

When a person cannot pay his/her debts, the term bankruptcy is used, while a company is said to be insolvent (instead of bankrupt) if it cannot settle its debts. I’ve used both terms in this article as many people still use bankrupt when searching the internet for advice.

So when a limited company is bankrupt (insolvent), what will happen? And as a company director, what should you do if your company finds itself in such a situation?

What to do if your limited company is bankrupt (insolvent)

To minimise losses to creditors, you have to stop trading immediately as soon as you notice there is a possibility for your company to become insolvent. It’s important you act first so you don’t bear the personal liability for debts your company owes.

Also, you have to seek assistance from professionals to assess the situation at hand and provide suitable solutions or advice.

Rescuing your business might be possible depending on the situation at hand; for instance, debt restructuring could be a viable option. However, if the company can’t be rescued then there are some closure options to look at as well.

Rescuing a bankrupt company options:

HMRC Time to Pay arrangement (TTP)

If you are not able to pay your tax on time, HMRC may accept a Time To Pay arrangement that offers payments of debts in instalments.

Alternative finance

Funding methods like asset-based finance and invoice finance can serve as an alternative option to bank funding, which may be suitable for your business.

Company Voluntary Arrangement (CVA)

A CVA is a formal agreement that allows a company to repay debts over time, and the duration for repayment usually lasts between 3 and 5 years. It freezes charges and interest, and any leftover debt may be written off at the end of the term.

Company administration

Bigger companies have a lot of things to benefit when they enter into administration; this process offers a moratorium period that allows the administrator to create a plan without any risk of legal action against the company.

If you would like any advice on any rescue options please call us fro some free advice on 0800 975 0380

Closing a bankrupt company options:

Liquidation

Liquidating the company will be the only option in some cases, and a Creditor’s Voluntary Liquidation (CVL) would be ideal if such should happen. The creditor’s interest is paramount in a CVL; however, the directors could also benefit from it.

If you are an employee and director of your company at the same time, you may be entitled to director redundancy as well as other statutory privileges just as other employees or staff.

Director redundancy – even if it’s not really a suitable solution for a bankrupt company – could provide the money required to settle the professional fees involved and also prevent compulsory liquidation. Find out more about director redundancy claims.

Upon liquidation of a company, a licensed insolvency practitioner oversees the company, realises the company’s assets, and distributes funds to settle the company’s creditors. Since the company itself is a legal entity from the directors of the company, you as a director is protected from any personal liability except certain situations arise.

For instance, if you provided personal guarantees for business borrowing, it can make you liable for the outstanding sum. The officeholder, during the process of liquidation, investigates the company’s decline that resulted in it becoming insolvent, and forward their findings to the Secretary of State.

When a company is bankrupt (insolvent), it does not mean the business will end – some suitable options might be available.

Dissolution – an informal approach to closing a company

Dissolving a limited company can be performed by the director themselves, allowing them to retain control and also ensuring unnecessary costs are not incurred. The end result is the same as a liquidation in that the company is closed and the company’s debts die with the company.

The dissolution process is best used when the company has no assets, such as cash or stock which could be used to pay for a liquidation. Get in touch with us on 0800 975 0380 to find out whether this option would be suitable for you.

The process does not demand that 3rd parties are given intrusive access into the business operations and the affairs of the directors personally.

If correctly undertaken, a dissolution has no lasting negative reflection on the directors and usually much less costly than a liquidation. However, if the process is not done correctly the director could leave themselves open to misfeasance claims and accusations of wrongful trading.

What happens after the closure of a bankrupt company?

Following the closure of an insolvent company, it is removed from the register at Companies House. You can be a director of a different company if you choose to; provided no wrongdoing was found in the liquidator’s investigation. The only issue now is that you cannot create a new company with similar or the same name.

Get free advice on business bankruptcy today

You can reach out to any of our experts at Forbes Burton for professional guidance or information on limited company bankruptcy. Call us today on 0800 975 0380 for free, impartial, and confidential advice or email [email protected]