How to declare bankruptcy in business

The difference between business bankruptcy and insolvency

You may have heard of the words ‘bankruptcy’, ‘insolvency’ and ‘liquidation’ all used to describe businesses that are struggling financially, but they all mean different things. 

A sole trader or partnership can become ‘bankrupt’ when it does not have enough cash to pay its debts. In this type of structure, there’s no legal separation between the business and the people who own it. The business’s debts are also the debts of its owners, and bankruptcy is the process the owners can use when they can no longer pay them. 

In a limited company, the business and its owners are financially and legally separate. They are two separate entities. When a limited company cannot pay its debts, it’s said to be ‘insolvent’. Although it’s a different word, it means a similar thing. The company cannot pay its debts when they are due. If the company cannot be saved, it will enter ‘liquidation’ to be wound up.

How do you declare bankruptcy in business?

If you run a sole trader or partnership and want to declare yourself bankrupt, you can do so by filing a bankruptcy petition with the court. You can also be forced into bankruptcy by a creditor (a party you money to) if they have issued you with a Statutory Demand or County Court Judgment (CCJ) that you have not paid.

Your bankruptcy will usually be supervised by an officer of the court known as the Official Receiver. They will sell your personal and business assets to repay your creditors. Depending on your income, you may also be required to make regular payments to your creditors. When the 12-month bankruptcy period ends, any remaining debts you have not repaid will be written off. 

Although you can continue to operate as a sole trader after filing for bankruptcy, it can be difficult, particularly if your business requires finance to operate. That’s due to the serious impact bankruptcy has on your credit rating.

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How do you initiate company insolvency?

When a company can no longer pay its debts or the value of its assets does not cover its liabilities, it is insolvent. When your business becomes insolvent, you must cease trading and seek advice from a licensed Insolvency Practitioner. They will assess the company’s financial position and guide you through your options. 

If the business has a realistic prospect of making a recovery, it may be possible to use a formal insolvency procedure, such as Company Voluntary Arrangement (CVA) or Administration, to restructure its debts so it can continue to trade. 

On the other hand, if the business is no longer financially viable, the directors can enter it into liquidation voluntarily using a Creditors’ Voluntary Liquidation (CVL). The company’s creditors can also force it into Compulsory Liquidation if they have unsuccessfully tried to recover a debt.   

What happens when a limited company is liquidated?

If a director chooses to liquidate their company voluntarily, they can appoint their chosen Insolvency Practitioner to act as the liquidator. In a Compulsory Liquidation, the liquidator will be appointed by the court.

Regardless of who acts as the liquidator, the process is very similar. The business’s affairs will be wound up and the liquidator will value and sell its assets to repay the company’s creditors as far as possible. Any remaining debts will be written off and the company will be struck off the official register at Companies House and cease to exist.

Crucially, unlike bankruptcy, as the company is a separate legal entity from its directors, the personal funds of the directors should not be at risk. There are exceptions, however. If you have signed a personal guarantee for company borrowing, have an overdrawn director’s loan account or engaged in unlawful or wrongful trading, you could become personally liable for some or all of the company’s debt. That could lead to bankruptcy if you cannot pay what you owe.

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What happens after the closure of an insolvent company?

Your conduct during and leading up to the insolvency will be investigated as part of the liquidation process. As long as no wrongdoing is found, you are free to become the director of another company, although you cannot use the same business name as the failed company without the court’s permission.

On the other hand, if the liquidator finds you did not meet your legal duties as a company director or engaged in misconduct, such as continuing to trade while insolvent or not keeping proper accounting records, you could be disqualified from acting as a director for up to 15 years.  

Professional support for bankrupt businesses

If you want guidance on declaring bankruptcy in business or are worried about your company’s financial position, we can help. At Real Business Rescue, we can advise you on your options and have the practical expertise to rescue struggling businesses or liquidate them if they’re no longer viable. Please get in touch for a free, same-day consultation or arrange a meeting at our 100+ offices throughout the UK.