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Limited Company Bankruptcy Does Not Exist

Limited Companies do not go Bankrupt but…

What Is Limited Company Bankruptcy?

Limited companies do not go bankrupt they go into Liquidation.

In the UK the legislation says that people go bankrupt not companies. Companies can go into Liquidation, Administration and other insolvency procedures but they cannot go bankrupt.

A bankrupt company will by definition be insolvent and therefore unable to pay its debts when they fall due or alternatively its assets will be exceeded by its liabilities.

Having said that this is purely a technical position. In reality, the insolvency of a limited company results in bankruptcy meaning that it will stop trading and cease to do any business other than becoming involved in an orderly winding up of its affairs.

What Are the Consequences of Limited Company Bankruptcy?

The consequences of limited company bankruptcy are that the Directors will lose their powers in light of Section 103 of the Insolvency Act 1986 and the employees will be made redundant.

A bankrupt company still needs someone to run it even though it will not trade. As a result, a Liquidator will be appointed to wind up the company’s affairs prior to it being dissolved at Companies House.

Consequences For Directors Personally

A common question in the case of Limited Company bankruptcy (really should be called Limited Company Liquidation is what happens to the Directors personally when the company goes into Liquidation?

A company is a separate legal person from its Directors and so the answer is because of Limited Company Liability the Director is not directly personally liable for the company’s debts EXCEPT when they have been personally guaranteed OR sometimes if the Directors are guilty of certain types of UNLAWFUL conduct in respect of the company.

A similar position arises in respect of company shareholders’ liability for company debts.

Director Of More Than One Company

If someone is a Director of more than one company and one of the companies goes into Liquidation, then provided they have not been the subject or about to be the subject of Company Director Disqualification Proceedings that result in a Disqualification Order, then simply going into the Liquidation will not impact on their other Directorships and it will not stop them being able to act as a Director.

However, if at anytime a Director does become the subject of Disqualification from acting as a Director they may no longer hold the other Directorships and MUST without permission from the court, resign.

What Kinds Of Liquidation Arise From Limited Company Bankruptcy?

There are two kinds of Liquidation that arise from limited company bankruptcy ie. a Creditors Voluntary Liquidation or a Compulsory Liquidation.

Creditors Voluntary Liquidation

In a Creditors Voluntary Liquidation, the Liquidator is appointed by creditors without any involvement of the Court. That is why it is called Voluntary Liquidation. That action of placing the bankrupt company into Liquidation is not forced and it remains a choice.

In practical terms, the matter of it being voluntary and not forced may only be a matter of legal procedure. If a company is so bankrupt and unable to trade without the Directors being unable to avoid Liquidation then if they continue to trade they could be at risk of some element of personal liability for debts incurred during a period of Wrongful Trading. For those reasons, it is beneficial for Directors of a bankrupt company to take professional advice from an Insolvency Practitioner at the earliest possible stage.

If a voluntary Liquidation is considered the right course of action then the Directors will need to prepare a Statement of Affairs so that the creditors are provided an account of the bankrupt Company’s financial position.

Compulsory Liquidation

Creditors who want to recover a debt have by virtue of the Limitation Act 1980 six years to commence legal action.

The compulsory process is usually instigated with a winding up petition (the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 set out the relevant rules for the same).

Whereas in the case of a Compulsory Liquidation the action of the bankrupt company going into Liquidation arises from a winding up petition brought either by the company’s Directors or more commonly by one of its creditors. This is a court procedure that forces the bankrupt company into Liquidation by a Court Order after which the Official Receiver will take over and administer matters. Later on, it is possible that an Insolvency Practitioner could be appointed in place of the Official Receiver as the Liquidator at the request of creditors.

What Does a Liquidator Do In A Company Bankruptcy?

Liquidation is overseen by the Liquidator (either the Official Receiver or an Insolvency Practitioner). It involves:

  • making sure all company contracts (including employee contracts) are completed transferred or otherwise ended
  • ceasing the company’s business
  • settling any legal disputes
  • selling any assets
  • collecting money owed to the company
  • distributing any funds to creditors
  • repaying share capital to shareholders
  • dissolving the company and removing it from the Companies House register

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