Guide to Insolvency, Liquidation and Bankruptcy

   

If there’s one piece of advice to hold above all others while running your business, it’s this: cash is king.

It doesn’t matter how much you are selling or the size of your profit if your business doesn’t have enough cash. It’s possible for highly profitable businesses to run out of cash, normally because they don’t have enough money or can’t borrow enough to buy resources to fulfil orders.

Running out of cash is very serious, as it could lead to your business being put into liquidation or you being declared bankrupt. This doesn’t have the social stigma it may once have done, but is still a hugely disruptive event.

Here is Bytestart’s essential information about what happens when you run out of cash. As always, don’t rely on the information contained here, and if you are having money problems get professional help as soon as possible.

Insolvency

This is the catch-all title for running out of money. It means you don’t have the cash or assets to meet your current liabilities, such as money owed to suppliers or other debt repayments that are due.

Company liquidation

When limited companies become insolvent, they go into liquidation. This is a process where a liquidator comes in to wind up the affairs of the business and close it. That involves ensuring contracts have been completed, any legal disputes are over, assets have been sold and any money owed to the company is collected. At the end they will have the company struck from the Companies House register and it will be dissolved.

Types of liquidation

You can put your company into voluntary liquidation. This is normally done when the company is actually solvent – i.e. you’ve just had enough and want to shut it down. When the company is insolvent, it’s known as creditors’ voluntary liquidation. This is because some of the people you owe money too may not see it. There is also compulsory liquidation, where the court makes an order to wind up the company.

Alternatives to liquidation

If your company is in serious financial trouble liquidation isn’t the only option. You could attempt to work with your suppliers to find an informal arrangement that allows your company to become solvent again. This is in their best interests, as they are ultimately more likely to get their money if you keep trading in the long-term. Companies can also put a formal arrangement in place by applying to a court. You will need to appoint an authorised insolvency practioner to do this. The final option is to go into administration, a legal procedure that gives your company breathing space to take stock of the situation. You will work with an administrator to deal with creditors and consider future options.

Bankruptcy

As the director of a limited company, if it goes into liquidation, you will only lose what you put in (assuming you haven’t guaranteed any company loans with personal assets such as your house). If you are a sole trader and become insolvent, then you may personally go bankrupt. Anyone can do it, and it’s a way to free yourself from debts and make a fresh start. There are of course many downsides. Any assets you own will be shared among your creditors – that could mean losing your home. And while it’s easier to get going again after bankruptcy than it has ever been, you will find it tough to get credit.

Creditors’ Petition

If you owe one or more suppliers £750 or more, and it is not secured on an asset, they can actually petition to have you made a bankrupt. If this happens you must seek urgent professional advice.

The process

Once you and your advisors are certain there are no other options open to you, declaring yourself bankrupt involves filling out a couple of forms. You have to petition a county court; it does not have to accept you if it believes you have other options open. Ironically it costs up to £500 to go through the process. On the date of the order you will lose control of your assets (including your business assets), and the receiver will decide which are to be sold to repay creditors. If your business is still running it will typically be shut down. Your bank account may be closed. For the next year there will be heavy restrictions on what you can and can’t do. And typically after a year you become a discharged bankrupt and can restart your financial life.

Alternatives to bankruptcy

There are many alternatives which you should discuss with a professional advisor. They include loan consolidation, debt management planning and the Individual Voluntary Agreement. This is a popular alternative to going bankrupt. It is a formal agreement between you and your creditors, where you commit to paying off your debts over about five years. You’ll need help from an authorised insolvency practioner to do this.

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