If you’re a limited company director and you suspect your company is bankrupt, you need to act fast.

In this article we’ll explore how to know if you’re bankrupt, and what to do about it if you are.

Company Bankruptcy Means Insolvency

The first thing to realise is that bankruptcy is really the term used for individuals. Where companies are concerned the correct term is insolvency and there are two simple tests you can do to establish whether your company is insolvent or not.

If you fail either of the following simple tests we suggest you contact an insolvency practitioner at your earliest convenience.

Cash Flow Test

Can you pay your bills when they fall due? Do you have the necessary cash flow to keep your business running.

Balance Sheet Test

Add up your liabilities in one column, and your assets in another. If liabilities exceed assets then you are insolvent.

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    What Happens if a Company Declares Bankruptcy?

    Once you’ve ascertained that you’re insolvent, you need to take professional advice. It is legally required to use the services of an insolvency practitioner to liquidate a company with debt.

    Once you’re insolvent, your first responsibility is to your creditors so, as a director, you should act carefully and cautiously in this period. Don’t pay anyone, including yourself, or sell any assets, everything which remains belongs to creditors. It would be wise to record every action you take in a notebook, because improper action during this period could hold you open to charges of wrongful trading.

    After consulting with an insolvency practitioner (IP), you will be apprised of your options. It may be possible to arrange a rescue package of some kind: this may be what is called a CVA, which is a formal repayment plan with creditors.

    If the right course of action is to close the company, the IP will deal with creditors, assess and then sell any assets, and dissolve the company formally. Creditors will be paid in order of priority, should there be funds for that.

    At the end of this process the company will cease to exist. As a former director you’re free to seek further employment and you will be free to start another company, assuming there are no bans against you doing so.

    The key thing is you have put a halt to the creditor pressure, and to a company which wasn’t going anywhere. You have taken decisive action and can now get on with your life.

    Do Employees get Paid when Company Goes into Liquidation?

    When a company goes into liquidation, any remaining money in its accounts, plus the combined sum the IP can gather from the sale of its assets, go into a pot to pay creditors.

    Employees are what is known as ‘preferential creditors’, meaning their claim comes higher than suppliers, customers or contractors.

    If the company assets do not cover the money owed to employees, there is also the Redundancy Payments Office, which is a government entity offering statutory payments that include arrears of wages, holiday pay, notice pay & redundancy pay.