At Witan Solicitors, we have extensive experience in assisting companies during times of financial difficulty. We are often asked, what happens when a company files for bankruptcy? In this article, we take a look at the situation that arises when a company is no longer solvent and what happens during the liquidation process, which is the term used for a company bankruptcy.
When a Limited Company is Bankrupt
The term ‘bankrupt’ is only generally used in respect of individuals. When a company goes through a financial crisis, it is referred to as insolvency. A company is insolvent when either:
- It cannot pay its debts when they fall due; or
- Liabilities exceed assets on the company’s balance sheet
If a company is insolvent, it does not necessarily mean that the business is at an end. There are three options which might be available to allow it to continue trading, namely:
- You may be able to reach an informal agreement with your creditors; or
- The company could enter a company voluntary arrangement; or
- The company could be put into administration
It is important not to ignore insolvency. Taking prompt action will give you the best possible chance of saving your company. It is unlawful to continue to trade once insolvent unless you have reached an agreement as above or entered into administration. If a director continues to trade after insolvency, they could be held personally liable for the company’s debts.
What Happens if a Limited Company is Liquidated?
If the decision is taken to cease trading, then your company will need to be liquidated. This is a winding-up process and the company’s assets will be sold and all of the company’s funds used to pay any creditors.
Types of Liquidation
You can either decide on this course of action, known as members’ voluntary liquidation, or in some cases, liquidation can be agreed upon with creditors, in which case it is referred to as creditors’ voluntary liquidation.
Alternatively, liquidation may be ordered by the courts, in which case it is a compulsory liquidation.
Putting a Company into Liquidation
The liquidation process will be dealt with by a licensed insolvency practitioner who will value the assets and oversee their sale. The proceeds of the sale will then be distributed to the creditors in accordance with the order of priority set out in the Insolvency Act 1986.
The company will then be dissolved.
Rescuing a Bankrupt Company
In some cases, it may be possible to rescue an insolvent company. The available options are:
- An informal agreement with creditors
- A company voluntary agreement (CVA)
- Administration
- Administrative receivership
An Informal Agreement with Creditors
Your creditors may be prepared to enter into an agreement with you regarding the payment of your debt to them. This could be to their advantage as it will mean they do not have to take legal action to recover their money and, if your company recovers, they may have the option of continuing in a profitable relationship with you.
You can ask your creditors if they are prepared to enter into an informal agreement and negotiate the terms and conditions of this.
This type of informal agreement is not legally binding and it is open to creditors to withdraw from it at any stage, should they wish to do so.
A Company Voluntary Agreement (CVA)
A company voluntary agreement or CVA is a legally binding agreement arranged through an insolvency practitioner, who will draft a repayment schedule and forward it to your creditors for their consideration.
If those holding 75% or more of your debt wish to enter into the agreement, then the CVA will be put into place and you will be required to make the payments in accordance with the schedule.
If you fail to make any of the payments, any of your creditors can ask the court to make an order winding up your company.
Administration
Putting a company into administration gives it a period of protection from legal action by creditors in which to consider the next steps. A professional insolvency practitioner will need to be appointed as the company administrator and they will control the company and its assets. They can decide to cancel contracts and make employees redundant if they believe this is the best option for the company.
Options open to an administrator include entering into a CVA or a creditors’ voluntary liquidation. They can also try to sell the business as a going concern.
The administrator will need to advise the company’s creditors and employees of what their plans are and also notify Companies House.
Administrative Receivership
If you have a secured creditor, such as a bank from whom you have borrowed funds, then they can appoint an administrative receiver if you default on the loan.
They can do this even if your company is not insolvent. The receiver will be a licensed insolvency practitioner. They will sell the company’s assets in order to repay the money the bank or other creditor is owed. It is also open to them to sell the company as a going concern.
With an administrative receivership, the receiver acts solely for one creditor, unlike the administration, where the insolvency practitioner will try to secure the assets for all creditors.
Contact Our Company Bankruptcy Solicitors
If your business is experiencing financial difficulties and you need advice from one of our insolvency experts, give us a call.
We have nearly forty years of experience in dealing with insolvency and bankruptcy and we have successfully helped hundreds of clients in a wide range of sectors navigate this difficult period.
Taking prompt action is key and we can move quickly to protect your position and give your business the best possible chance of recovery or deal with your creditors with discretion and without the need for legal action.
We can go through the available alternatives to liquidation with you and give you an honest assessment of the strengths and weaknesses of your position. Our in-depth expertise means we can advise you of the best course of action and the implications of the options open to you. Our advice will be tailored to your unique circumstances and will set out the best way of achieving your preferred outcome.
For more information in respect of our services, see our insolvency page.
Seeking the advice of our proficient contract lawyers? Contact us by sending an email to info@witansolicitors.co.uk, or completing our contact form. We are prepared to engage in a detailed conversation regarding your situation, allowing us to explore how we can offer our assistance. Our offices are conveniently situated in Birmingham, Northampton, and London.
