If you or your limited company do not have enough money to settle debts on time, there is a strong chance of bankruptcy.
Your limited company can also go bankrupt if the value of its assets is less than its overall liabilities, including any liabilities that may come up in the future.
When considering your options, it’s important not to confuse insolvency and bankruptcy.
If you or your company are insolvent, this means that you are unable to pay your debts on time, whereas bankruptcy is the legal process when a person has been declared insolvent.
What Steps Should I Take if My Limited Company Goes Bankrupt?
It is crucial to cease trading immediately if you notice signs that your company is insolvent.
This will minimise any losses to creditors and ensure that you do not bear personal liability for debts owed by your company.
Depending on your situation, it could be possible to rescue your business. Below are some options for saving your limited company, as well as some viable closure options.
In both cases, your first step should be to seek advice from a professional who can assess your situation and discuss limited company bankruptcies and possible solutions.
What Are My Options to Rescue My Bankrupt Company?
An Individual Voluntary Arrangement (IVA)
The Government introduced Individual Voluntary Arrangements (IVA) in 1986 as an alternative to bankruptcy.
The process provides a formal structure based on affordability rather than any previous contractual arrangements and enables you to make more realistic repayments to creditors.
An IVA usually lasts five years – though this can be extended – with people paying what they can afford monthly before any remaining debt is paid off.
If you wish to put together an IVA proposal, you must have a minimum of £5,000 worth of eligible debt (i.e., debt which can be included in an IVA).
Once an agreement is reached, your creditors cannot force you into bankruptcy and promise to legally ‘write off’ any outstanding money at the end of your arrangement – providing you successfully reach the end of the IVA process.
A Company Voluntary Arrangement (CVA)
A CVA can be implemented when a business is in trouble but shows signs of being financially viable and could still be profitable in the future.
The arrangement means all of the company’s debt can be transported into one manageable monthly payment, so it can carry on trading without worrying about the threat of liquidation or winding-up orders. Petitions or liquidations are being threatened.
The conditions of a CVA (known as the CVA proposal) are a binding contract for all parties, including creditors. Usually, they provide lower monthly outgoings for the business while eliminating the pressure of legal action while the CVA is active.
The proposal will also outline how much debt creditors will be paid back during that period.
A CVA can effectively solve severe debt problems, and your company could be legally debt-free in five years or less. Once the CVA is completed, all debt should be written off.
Administration
Pre-packaged or traditional administration will halt all legal action against a company. This will also stop creditors from winding up the company and give you time to explore your options.
An administrator (also known as an Insolvency Practitioner) will be called in to see whether the company can continue trading or be sold so that new owners can turn the company around. If it can’t be sold, the company will be closed down and the assets sold to cover its financial responsibilities.
At this stage, you may also consider voluntary liquidation, giving you time to prepare to handle obligations such as personal guarantees, redundancies, and lease terminations.
Read more about Company Administration
The HMRC Time To Pay Scheme
If your limited company struggles to pay its taxes – such as PAYE and VAT – Her Majesty’s Revenue and Customs may accept a Time to Pay Arrangement, allowing you to repay your debts in instalments.
Read more about Time to Pay Arrangements.
What Are My Options if I Want to Close My Bankrupt Company?
Liquidation
When a business finds itself in too much debt to recover through recovery procedures such as financing, administration, or a Company Voluntary Arrangement (CVA), it may be that a Creditors’ Voluntary Liquidation (CVL) is the only viable course of action.
Liquidation is the more intrusive and more costly process, which will essentially remove any authority of a director.
All control of the process and the business concerns are overseen by an appointed Insolvency Practitioner (IP).
When your company is in liquidation, no legal proceedings can be taken against it. Providing you have no personal liability for your company’s debts, your creditors will be unable to take any further action against you.
A director who has previously liquidated a company can, in future engagements, be viewed as a higher investment risk, potentially affecting their ability to perform business in the future.
Dissolution (also Known as a Company Strike Off)
You can choose to dissolve your limited company, which is the cheaper of the two options.
When a limited company is removed from the Companies House register, it is known as a ‘Strike Off.’ There are two types of strike-offs – a Voluntary Strike Off and a Compulsory Strike Off.
Choosing the Strike Off process means you are not required to give third parties intrusive access to your business operations and the personal affairs of you or any other directors.
A Strike Off will have no lasting negative reflection on you as a director if correctly performed.
What Happens When Bankrupting a Limited Company?
If you choose to close your insolvent company, it will be removed from the Companies House register.
If no wrongdoing was found in the liquidator’s investigation, you would be allowed to become a director at a different company.
The main thing to remember is that there are legal restrictions for using the same or similar name as your old business when starting up a new one.
It’s essential first to seek professional advice, so contact us today. Our initial consultation is FREE. Here we will assess the viability of the business and offer advice on appropriate strategies.
We will also advise on the solution options available concerning your specific situation and requirements regarding bankrupting a limited company. These solutions are wide-ranging, cost-effective, and flexible.
