Bankruptcy for Business Owners

If you are struggling to repay business debts, then filing for business bankruptcy may be a good option for you. Please be aware that there can be serious consequences for filing bankruptcy. Which you should carefully consider before taking this option. There are also many positives for making your business bankrupt. For example, it can give your business a fresh start after clearing all debts. This article explains everything you need to know about bankruptcy for business owners.

What happens when a business files bankruptcy

Company creditors can apply to the courts to prevent you from being a director of a company in the future. However, this is only likely if the company failed because of your mismanagement.

It is also important to note that normally a bankrupt is not allowed to be involved in the formation, management or directorship of a limited company. You might be allowed to be involved in a franchise, but this depends on the individual organisation offering the franchise.

Additionally, if you want to start a new business, banks could also be less willing to offer credit facilities to you. This will then affect your future business’s ability to trade.

Please note, the government makes provision for struggling businesses and partnerships by providing an alternative to bankruptcy. It may be appropriate to use a Voluntary Arrangement to deal with the debts, this can be an Individual Voluntary Arrangement or a Partnership Voluntary Arrangement. You may benefit from speaking to an Insolvency Practitioner to look at these options and investigate the pros and cons with you.

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Will I lose my business If I go bankrupt

The Official Receiver (OR) in bankruptcy has no wish to stop you from trading. However, you are not usually allowed to act as the director or manager of a limited company.

Assuming you are a sole trader you will need to attend a meeting with the OR’s office in person. But it should be possible to continue trading. In some instances, the OR will take your current stock and cash. They will use it to pay for your existing debts. Being bankrupt may affect your relationship with suppliers. It all depends on the nature and viability of your business.

If you own or are the director of multiple businesses then it depends on the legal status of these companies. In the case that either is incorporated, then that company has its own legal personality. The directors will be protected (save any personal guarantees) by something called limited liability. If neither entity is incorporated and you took the loans out in your name. Then your creditors will look to realise assets from your other company.

Does business bankruptcy affect personal assets

If you are the Director of a Limited Company you will be protected from liability for any credit obtained in the company’s name.  However, this is only if it is a Limited company.

Your personal liability or exposure, when a business goes Bankrupt, depends on what guarantees you have offered as company directors, and how you have run the business, especially towards the point when the business becomes insolvent. Assuming you have no guarantees and you’ve run the business well, then bankruptcy should not impact you personally. This means property, jointly owned property and other assets owned personally will not be affected. You are also still able to have a personal bank account as your limited company’s financial affairs are completely separate from your own personal financial affairs.

On the other hand, if you personally go bankrupt, then Bankruptcy only affects your personal assets and wouldn’t necessarily impact a company that you are a director of. Unless you personally guaranteed any debt taken out for it. If you did personally guarantee company debt then this debt can be included in your personal bankruptcy. Any debt in your business would need to be dealt with separately and should your business go bankrupt then you will need to step down as director.

Please note, if you are going bankrupt personally you can not make your company into a limited company and then declare it bankrupt to save your personal assets. This means that even if you were to make your business into a limited company all debts incurred prior to the date of bankruptcy would still be in your name and you would still be liable for them.

I’m a shareholder for a bankrupt company

If you are a shareholder you will be personally liable up to the value of the shares. For example, 50 £1 shares mean a liability of £50. Sometimes the trustee will try to realise the value for them. The trustees alternative is to try and realise the assets in the company and distribute them either by way of dividend or by winding up the company. Our advice would be to negotiate with the trustee for the return of the shares for a small sum as they are unlikely to realise very much via alternative routes.

What happens to company assets?

In bankruptcy, the OR will investigate any assets that have been sold or disposed of in the last 5 years. Any tools of the trade necessary for the business will not be included in Bankruptcy. The only restriction you may face as a result of going bankrupt would be in respect to the amount of credit you would be able to take out.

If you go bankrupt, any assets belonging to employees or other individuals in the company will in most cases not be taken away. Problems arise if for example, the company has provided you with an asset – a car or something. Then the liquidator may be able to seize that asset on the grounds that by providing you with it they have deliberately put creditors at a disadvantage.

Also improper conduct, for example hiding assets could lead to you being disqualified as a director. Obviously none of the above applies if you have given a personal guarantee over a debt. In which case your assets could well be at stake if you can’t meet that debt.

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Am I still liable for the debt as a personal guarantor with the company in liquidation?

A personal guarantor would continue to be liable for the debt even though the main debtor, has been declared bankrupt. However, if the original loan or debt was for business purposes and is, therefore, a business debt. We would advise you to contact Business Debtline for detailed advice.

It seems that the best person to contact about this debt could be the Insolvency Practitioner. If the company was no longer able to pay the debt and you are the personal guarantor. Then you became personally liable at that point.

However, if you are seeking to make a complaint against the company that arranged the personal guarantee. Then it may be that you could contact the Financial Ombudsman Service for help. If you are receiving threatening phone calls from the company then a complaint should be directed to them.

If you do find that you are liable for the debt and need to look into your options for dealing with the debt. Then you could start by contacting a free debt advice charity. They may be able to help you with this and any other personal, unsecured debts that you may have.

I have a business lease, will my guarantor be liable if I go bankrupt?

A guarantor is someone who makes a pledge or promises to pay for someone else’s debt in instances where the debtor defaults on a financial obligation such as a loan, lease or mortgage etc.

If someone has signed as a guarantor and the business debts are included in the bankruptcy then the guarantor’s liability for the debt still remains and they will be asked for the remainder of the debt. Unfortunately, the individuals who guaranteed your business lease would become liable for it if you declared yourself bankrupt.

Your bankruptcy deals with your personal liability for the debt and you cannot be pursued for the debt. The guarantors’ liability for the debt still remains and they will be asked for the remainder of the debt.

Please be mindful of the fact that your guarantors would only become liable for any debts they personally guaranteed, and not necessarily liable for all of your business-related debt.

Can I appoint someone else as the director?

As an undischarged bankrupt you are not permitted to act as a director of a company, You can not take part in its management, promotion or formation without the court’s permission. If you intend on applying to the court for permissions then you need to speak to your OR.

If you are the director of multiple companies, then you can still act as a Director of a limited company. However, as long as you aren’t disqualified under the Company Directors Disqualification Act 1986. This Act says that the court can disqualify a director if the company becomes insolvent. The Directors conduct in that business has made him unfit to run it. But equally the court does not have to take this course of action.

Can I enter a business partnership after bankruptcy?

An individual is not prohibited from trading in partnership, although he/she must still disclose the name in which he/she was adjudged bankrupt. An undischarged bankrupt cannot be a member of a Limited Liability Partnership except with the leave of court. You can find more information on the Insolvency Direct website.

Also if you are an undischarged bankrupt of subject to a restriction order, you’d need to tell anyone you do business with that you are bankrupt or subject to a restriction order.

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How will making my company bankrupt affect my credit rating?

A personal credit rating is created by looking at all the information that is available and relevant at the time of the application. Some of this information is found on your credit report. Other information could be gained by your answers to questions on the application form.

The credit reference agencies will hold information about the payment history of your personal debts. This will show public register information, such as the electoral roll and register of judgments and fines. An application form may ask about employment, previous employment and income. It could also ask anything that the lender feels necessary to assess the risk of lending to you.

The answer will depend on the circumstances around the company failure. It can be possible to have personal debts after the failure of a limited company. Especially if you have given personal guarantee or failed to act in accordance with the director’s responsibility.

If you have not personally guaranteed any of its debt, then your personal credit rating should not be affected by the company’s bankruptcy. For more information on credit ratings, please see our article on what can affect your credit rating.

Need further help?

To receive advice on business-related issues, it would help to talk to National Debtline. You can also contact Business Debt Line for further help and visit the GOV website.

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