If you’re a limited company director and you suspect your company is bankrupt, you need to act fast.
When a company goes bankrupt, your duties as a director shift abruptly, and you’ll need to be apprised of your responsibilities.
In this article we’ll explore how to know if you’re bankrupt, and what to do about it if you are.
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When a Limited Company is Bankrupt
When a limited company is bankrupt, the directors have a duty to act in the best interests of the company’s creditors. This means that they may need to liquidate the company, which is the process of selling the company’s assets and distributing the proceeds to creditors in order of priority.
Here are the steps that a director should take when their company is bankrupt:
- Seek professional advice from a qualified insolvency practitioner. An insolvency practitioner can help the director to understand their options and to comply with their duties as a director.
- Cease trading immediately. This will minimize the company’s losses and protect the interests of creditors.
- Cooperate with the insolvency practitioner. The insolvency practitioner will need the director’s assistance in liquidating the company.
- Provide the insolvency practitioner with all the information they need. This includes information about the company’s assets, liabilities, and financial transactions.
- Keep accurate records of the company’s financial position and transactions. This will help to ensure that the liquidation process is conducted fairly and efficiently.
- Do not trade the company recklessly or fraudulently. This could result in the director being personally liable for the company’s debts and being disqualified from being a director for up to 15 years.
Liquidation is a serious matter, but it is important to remember that it is not the end of the world. With the right advice and support, the director can get through this difficult time and start again.
What is it Called when Company Goes Bankrupt?
Insolvency is a legal term that describes a company that is unable to pay its debts. When a company becomes insolvent, it may enter liquidation. Liquidation is the process of closing down a company and selling its assets to pay off its debts.
The liquidation process is overseen by a licensed insolvency practitioner (IP), who is responsible for identifying and valuing the company’s assets, selling them, and distributing the proceeds to creditors in order of priority.
Once a company is liquidated, it ceases to exist as a legal entity.
It is important to note that liquidation is not the only option for insolvent companies. There are other options available, such as administration and company voluntary arrangements (CVAs). However, liquidation is often the best option for companies that are heavily in debt and have no prospect of trading profitably again.
What Happens if Your Company is Liquidated?
When a limited company is liquidated, it means that the company is being closed down and its assets are being sold to pay off its debts. The liquidation process is overseen by a licensed insolvency practitioner (IP), who is responsible for identifying and valuing the company’s assets, selling them, and distributing the proceeds to creditors in order of priority.
Once the company is liquidated, the directors’ powers cease and they are required to cooperate with the IP. The IP may also investigate the directors’ actions in the lead-up to the liquidation to ensure that they did not act in a way that was prejudicial to the interests of creditors.
Directors have certain rights and obligations during liquidation, including the right to be informed of the liquidation process and to be consulted on the IP’s proposals, the right to access the company’s records and to inspect the IP’s accounts, and the right to apply to the court to remove the IP or to challenge their decisions. Directors also have an obligation to cooperate with the IP and to avoid doing anything that could prejudice the interests of creditors.
Can a Bankrupt Company be Rescued?
Insolvency practitioners don’t just deal with liquidation, they are also adept at rescuing companies if there is the possibility to do so.
The first thing the IP must ascertain is what will bring the best return for creditors. If keeping the company alive is the logical way to do that, rescue procedures such as putting the company into administration, or a structured repayment plan for creditors known as a company voluntary arrangement could be considered.
Administration is a process which allows the IP to restructure the company into something leaner and more profitable. This may involve laying off staff and selling assets but it’s done to help the company find its way back to profitability, and ensure the creditors receive the best possible return.
Can a Bankrupt Limited Company be Rescued?
Yes, a bankrupt limited company can be rescued. Insolvency practitioners (IPs) are experts in both liquidation and company rescue. If there is a possibility of rescuing a company, the IP will assess the situation and determine what will bring the best return for creditors.
If keeping the company alive is the logical way to do that, the IP may consider rescue procedures such as administration or a company voluntary arrangement (CVA).
Administration is a process that allows the IP to take control of the company and restructure it into a more lean and profitable business. This may involve laying off staff and selling assets, but the goal is to help the company find its way back to profitability and ensure that creditors receive the best possible return.
A CVA is a formal agreement between a company and its creditors to reduce the amount of debt that the company owes. If a CVA is successful, it can allow the company to continue trading and avoid liquidation.
Whether or not a bankrupt limited company can be rescued depends on the specific circumstances of the case. However, IPs are experienced in assessing the situation and developing a rescue plan that is in the best interests of all stakeholders.
Can I Lose My house if my Limited Company Goes Bust?
In most cases, the limited company structure is specifically design to prevent director’s becoming personally liable for company debt.
The key exception for this is where a director has signed a personal guarantee document for a loan. These are specifically designed to circumvent the corporate veil and make listed assets, such as a family house, liable.
In fact, where a personal guarantee document has been signed as collateral on a loan, that particular creditor (usually a financial institution) will call in the lien in the event of corporate bankruptcy (insolvency).
Are Directors Liable for Debts in a Bankrupt Company?
In the absence of a personal guarantee, directors should not lose personal assets, unless there is clear evidence of fraudulent or wrongful trading. These may prompt HMRC to consider personal liability.
What Happens after the Closure of a Bankrupt Company?
Once a bankrupt 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, directors are free to become directors of another company if they wish, whether in the same or a completely unrelated field. There are restrictions on setting up a new company with the same or a similar name, however, and your insolvency practitioner will be able to advise you further on this.