Is your Business Facing Bankruptcy or Liquidation?
Jan 18, 2016
If you are facing difficulties in your business, it is important to understand what happens if your business is insolvent and the implications for you and your future. Bankruptcy is used when you cannot pay personal debts. You may become liable personally for debts because of the structure of your business – for example as a sole trader or in certain circumstances in a limited company and if you are held personally liable, bankruptcy may be your only option.
Alternatively, if your business becomes insolvent you may choose to liquidate it or it may be forced into liquidation. Your business is insolvent when you do not have enough money coming in to pay your creditors.
There are three reasons why you may be made bankrupt. The first is because you choose to be made bankrupt because you cannot pay your debts. The second is because a creditor chooses to make you bankrupt because you owe them more the £5,000 or the final reason is you have broken the terms of your Individual Voluntary Arrangement, known as an IVA.
The process will ensure that your assets are shared to pay off your creditors and after a time, you will be debt free. The process itself is relatively straightforward. You make an application by applying to court and you will be allocated an official receiver and unless you appoint an Insolvency practitioner, they will also act as your trustee. The role of a trustee is to sell any assets to pay off some of your debt and you must cooperate with them at all times throughout the process. Creditors will submit a formal claim and they will be paid in this order:
- Money owed to employees
- Money owed to anyone else
- Interest owed on your debts.
If there is anything left afterwards, you will get this money back.
Whilst this sounds attractive if you owe lots of money, there are drawbacks to bankruptcy. You have to pay a fee to become bankrupt - £705 to make yourself bankrupt or £1,105 if you apply to make someone else bankrupt. You are only able to keep any belongings that you need for work or items you need every day such as clothes. In addition, your home could be sold, if you own one, to pay your debts and you cannot use your bank account, chequebook, credit cards or bank cards and your bankruptcy will remain on your credit file for 6 years. This will severely restrict your ability to get a mortgage, bank account or any kind of credit.
You can choose to liquidate your own business with a Members’ Voluntary Liquidation – this means your company is still solvent and you can pay your debts and you want to close. However, if you are insolvent because you cannot pay your debts you will use a Creditors’ Voluntary Liquidation.
Alternatively, one of your creditors can order your business to be liquidated, also known as compulsory liquidation, if you owe them money and cannot pay – they can obtain a court judgment and send a statutory demand for the outstanding money.
To avoid liquidation in these circumstances you must either pay the debt, agree to pay the debt using a Company Voluntary Agreement (CVA), put your business into administration or challenge the court order.
A creditor can also apply to the court for a winding up order – once this has been issued by the court because they decide that your business cannot pay its debts, your bank accounts will be frozen and all the business assets and property will be sold by the liquidator.
You should be aware that there are risks that you could be banned from being a director of a company for 2 to 15 years or face prosecution if you have not completed your duties as a director properly.
If you are facing bankruptcy or insolvency, you should speak to an experienced insolvency solicitor to discuss all of your options to ensure that you are fully aware of all the consequences of any action you take.
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