Can a company go bankrupt?
“What is company bankruptcy? Can a company go bankrupt?”
Yes and no.
It effectively can but it isn’t called a company bankruptcy.
Bankruptcy is one of those terms that most people think they understand but when we look at it more deeply, maybe they don’t.
Most people’s introduction to the concept and term probably comes from the Monopoly board game. Here it can usually be offset with a loan from other players or the central bank and the main consequences involve a couple of turns in jail to losing the game at worst.
In real life, an individual bankruptcy can have wider negative consequences that could take years to overcome.
A person can be made bankrupt if they owe £5,000 or more or if they choose to declare themselves bankrupt.
If declared bankrupt, a person’s assets can be forcibly sold to repay debts, their name and details will be published in the public Individual Insolvency Register and they will be subject to bankruptcy restrictions possibly for years depending on their conduct.
This will mean it’s hard if not impossible to obtain credit or even complete basic necessities such as opening a bank account.
Sadly, if the individual is also a sole trader then this would also mean their business would become insolvent and would have to cease trading. This is because legally, the individual and their business finances are essentially the same.
This is an option to avoid but it could be more effectively tackled through an Individual Voluntary Arrangement (IVA).
For limited companies, the rules are different.
If the owner or director of a limited company goes bankrupt, this doesn’t necessarily mean that the business will automatically fall into insolvency.
However, if a business can’t service its debts, even though the finances of its owner and directors are protected, it is said to be insolvent, not bankrupt. Although they are effectively the same thing.
An insolvent business has more options open to it than an individual in the same circumstances but one of the most important comes in deciding how an insolvent business is closed or liquidated.
There can be several alternative options to closing a business but if there’s no realistic chance of recovery then company liquidation will be the most likely outcome.
Creditors can force a business to be liquidated through a winding-up petition – this process is known as Compulsory Liquidation but can be expensive and problematic for directors depending on the circumstances.
A far more cost effective and efficient course of action would be to pursue a Creditors Voluntary Liquidation which gives directors more control over the process and timings of the company being placed into liquidation and allows them to be more engaged throughout the process.
We don’t like talking about the negative aspects of running a company but business closure is something that most owners will face at one point or more in their careers and being able to navigate it successfully could be the difference between being free to move onto their next challenge or spending important time, money and energy handling an ongoing liquidation.
We’ve taken other companies along this route many times before and are in the best position to advise you on the do’s; don’ts and absolutely mustn’ts when it comes to liquidation and business closures.
After we have our free initial consultation with you, we can work on a plan of action so you know exactly what is happening at what stage, what is required from you, and most importantly, when the process will be satisfactorily completed.
Then you’ll be free to pass go and roll the dice again on your next venture.