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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How to Know if Your Limited Company is Bankrupt
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. You should not pay any money out of company accounts, including salaries and suppliers, before taking professional advice. Failure to do this could leave you open to charges of wrongful trading further down the line.
First ensure you're clear on your financial situation via these tests:
Cash Flow Test
Can you pay your bills when they fall due? Do you have the necessary cash flow to keep your business running. If you're unable to pay bills on time, this may be a clear indication you're insolvent.
Balance Sheet Test
Add up your liabilities in one column, and your assets in another. If liabilities exceed assets then you are insolvent.
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 (company liquidation), the IP will deal with creditors, assess and then sell the company's assets, and dissolve the company formally. Creditors will be paid in order of priority, should there be funds for that.
Does Bankruptcy Mean Going out of Business?
Bankruptcy doesn't necessarily mean your business must close. Business rescue processes such as the Company Voluntary Arrangement (CVA) mentioned above, could provide a way to come through the debt.
If rescue is an option, your insolvency practitioner will advise you. If closure is the right solution, then you will have no choice but to liquidate.
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.
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.
What Will Company Bankruptcy Mean for Directors?
For directors, insolvency means the end of your role as director and the closure of the company, assuming the decision is made to liquidate rather than attempt a company rescue procedure.
The insolvency practitioners role in liquidation is to sell any assets of the company in order to pay creditors. When that is done, he/she will strike the company of the register at Companies House, after which it will cease to exist.
Assuming no wrongdoing (i.e. wrongful trading) has been discovered by the liquidator, directors will be free to assume a similar role with another limited company, or form another one themselves.
The only thing is you can't simply form another one with the same or similar name and pick up where you left off. There are strict rules around what is known as 'phoenixing' to prevent this.
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 personally liable for company debts?
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.