It’s definitely not just individuals who get into financial trouble. Companies went out of business from time to time long before COVID19 (and Brexit). The course of the pandemic has seen many of them fail already. The path towards the “new normal” may see even more fall by the wayside. With that in mind, here is a quick guide to company bankruptcy.

Understanding business types

There are three main types of businesses. These are sole traders, partnerships and limited companies. Sole traders are their businesses and vice versa. This means that any financial issues they experience will be treated in accordance with the personal insolvency rules.

Partnerships can be complex. In some cases, partners may be jointly and severally liable for each other’s debts. In other cases, they may only be held liable up to the extent of their stake in the partnership. It depends on the partnership’s legal standing. In either case, however, once liabilities have been decided, partners are in much the same situation as sole traders.

Limited companies are, however, very different. In most cases, the company’s financial liabilities stay with the company. Directors can only be held personally liable either if they acted as guarantors or if a creditor can prove malpractice.

In the UK, limited companies cannot go bankrupt the way individuals can (in the U.S. this is different). They can, however, become insolvent. This insolvency may or may not result in them going into liquidation. Here are some of the options available to struggling companies and what they mean.

Administration

Technically, administration is not a part of insolvency. In fact, it is not necessarily a precursor to it. That said, there tends to be a very strong link between companies going into administration and companies going through some form of insolvency process.

Basically, an administrator’s job is to put a struggling company out of its misery without creating (extra) misery for the company directors. It may be possible for an administrator to come up with a plan to nurse the company back to health. It may also be possible for an administrator to guide the company safely through a plan created by its existing directors.

The typical example of this is “pre-pack administration”. This is when a failing company spins off any “healthy” parts into a new company. The new company is then sold (often to the directors of the failing company). The failing company is then put into voluntary liquidation.

Company Voluntary Arrangement

A Company Voluntary Arrangement is the commercial equivalent of an Individual Voluntary Arrangement. In simple terms, a company (or its administrator) comes to an arrangement with its creditors to pay them less than they are due. If enough creditors accept the offer then the arrangement is binding on all creditors.

Like IVAs, the basic idea behind CVAs is that reducing the burden of debt allows a company to continue trading. This ultimately delivers a better return for creditors than effectively forcing the company into liquidation.

Creditors Voluntary Liquidation

Creditors voluntary liquidation is the commercial equivalent of a debtor petitioning for bankruptcy. By taking control of the process (rather than waiting for it to be forced on them), the company directors can obtain the best outcome for everyone, including themselves.

It is impossible to overstate the importance of going through the voluntary liquidation process in complete accordance with all regulations. This is possibly the strongest argument in favour of appointing an insolvency practitioner as early as possible. If there is any deviation from the correct process, even in error, directors may find themselves being pursued for funds.

Compulsory Liquidation

This is the commercial equivalent of being forced into bankruptcy. Essentially, a company’s creditors petition a court to order a company into liquidation. If the court agrees, the company directors must comply. As in the personal world, this form of insolvency is extremely rare.

 

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