When a limited company goes bankrupt, it means that it is no longer able to pay its debts and is insolvent. The company’s assets will be sold off to pay its creditors, and any remaining debts will generally not be recovered. The company will then be dissolved, and its business will come to an end.
During the bankruptcy process, the company’s directors will typically be required to cooperate with the appointed bankruptcy trustee, who will be responsible for managing the sale of the company’s assets and distributing the proceeds to the creditors. The directors may also be personally liable for any debts that the company is unable to pay.
In some cases, the directors may be required to contribute their own funds to help pay off the company’s debts.
If the company’s assets are insufficient to cover its debts, the creditors may file a lawsuit against the directors in an effort to recover their losses.
Rescue or closure options for bankrupt companies
There are several options available to a bankrupt company to try to rescue the business or to close it down in an orderly manner. One option is to enter into a company voluntary arrangement (CVA), which is a legally binding agreement between the company and its creditors to restructure the business and pay off its debts over a period of time.
Another option is to sell the business as a going concern to another company or individual, which may allow the business to continue operating and may provide some return to the creditors. If the business cannot be sold or rescued, the company may be required to go through the process of liquidation, which involves selling off the company’s assets and distributing the proceeds to the creditors.
In some cases, the directors may decide to simply close the business down and walk away, although this may have personal and financial consequences for the directors if they are found to have acted improperly.
Seeking professional advice
Seeking professional advice from an licensed insolvency practitioner is an important step for a company that is facing bankruptcy or is already insolvent. An insolvency practitioner is a professional who is qualified and experienced in dealing with the financial and legal aspects of insolvency and bankruptcy. They can provide valuable guidance to the company’s directors and help them to understand the options available to them and the consequences of different courses of action.
An insolvency practitioner can also help the company to negotiate with its creditors and work out a plan to pay off its debts. They can advise the directors on their legal obligations and responsibilities during the bankruptcy process, and they can help to manage the sale of the company’s assets and the distribution of the proceeds to the creditors.
In addition, an insolvency practitioner can help the directors to minimise their personal liability for the company’s debts and protect their own financial interests. Overall, seeking professional advice from an insolvency practitioner is a wise move for any company facing bankruptcy, as it can help to minimise the financial and legal risks and ensure that the process is handled in a fair and orderly manner.
Here are some of the possible routes that might wish to explore in order to prevent company insolvency:
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is a formal agreement between a business and its creditors. It is designed to help struggling companies repay their debts over an agreed period of time, usually 3-5 years. The CVA will also allow the company to continue trading as normal in order to generate income during this period.
The key benefit for creditors is that their debts can be repaid over a longer period of time, rather than all at once. It provides the best possible solution for creditors and the company, who both want to avoid liquidation and insolvency. Creditors are able to receive back some of the money owed and businesses are able to restructure their finances without ceasing operations.
Alternative funding
Alternative forms of funding can offer companies a lifeline when they are facing insolvency. Unlike traditional funding options, such as loans and financial investments, alternative forms of finance free up money quickly and can provide businesses with necessary capital to tap into in tight times.
Alternative funding is also often much more flexible; for example, invoice factoring allows the borrower to pay only for funds that have been collected from unpaid invoices. Companies should consider this type of financing if they need more cash flow without taking on further debt obligations. Alternative funds are an attractive option for companies looking to remain solvent and continue their business operations.
Company restructuring
Company restructuring is a difficult process that involves making significant changes to the way a business is run in order to improve its financial performance. This can involve selling some of the company’s assets to raise money, or reducing staffing levels in order to cut costs.
Both are tough decisions that have long-term implications for the business and its staff, often meaning redundancies in some areas of the company. Company restructuring is an important financial tool but companies must balance their need for stability with their need to make difficult decisions during times of economic uncertainty.
Company administration
Company administration has recently issued an eight-week moratorium to protect its best interests. During this period, all legal action against the company will be suspended. This break from legal action not only gives the Company Administration a moment to evaluate their current situation and assess any financial concerns or discrepancies, but also provides a distinct opportunity for recovery in cases where internal practices or external pressures have taken a toll on the organisation.
By proactively taking such measures and giving itself adequate time to review and consider corrective actions Company Administration is striving to provide employees with greater security and stability going forward.
Creditors’ Voluntary Liquidation (CVL)
Creditors’ Voluntary Liquidation can be an effective way for a company to close its doors due to financial instability. Creditors’ Voluntary Liquidation is when a company voluntarily liquidates or wind up its business by selling off all of its assets and satisfying creditors as far as possible with the proceeds.
This process can ensure that creditors receive the maximum amount of money back from the company, thus reducing any losses suffered due to unpaid debt. Creditors’ Voluntary Liquidation is a difficult but sometimes necessary step for companies who have difficulty paying their debts or have otherwise run their course, allowing them to move on in an orderly fashion.
Read more: Will I lose my house if my limited company goes bust?
Professional support if your company is going bankrupt
Our company understands how challenging liquidating a company can be for company directors. We have extensive experience of company liquidation, providing the guidance and support needed during this difficult time. With each company bankruptcy we enable directors to swiftly move forwards and decide on the best way forward for their company.
The experts at our company will expertly guide you through the entire process, helping you understand your options so that you can make the most suitable choice for your company when facing bankruptcy.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.