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The laws and legislation surrounding company closure and insolvency can seem complicated. So, if you ask random people what can happen if your company gets into debt, you’re unlikely to get the exact same answer.
So, if you’re struggling to repay your company’s liabilities when they fall due and you’re worried about the future, we hope the following will help debunk some of the myths you might have heard about company insolvency and help you find the right advice to combat the issue.
Company Closure and Insolvency Myths Debunked
If your business goes bust, you’ll lose your home
It’s every business owner’s nightmare, bailiffs showing up to kick you out of your home and repossess all your belongings.
One of the benefits of incorporating your business into a limited company is it separates your personal finances from your business’.
This separation is called ‘limited liability protection’ and means that unless you’ve signed personal guarantees for the business, your personal assets are protected if the company becomes insolvent.
Sole traders don’t have the benefit of this separation since they are their business, so they would be personally liable for their debts.
Insolvent companies must close
While it could be embarrassing to find your company is unable to repay its debts when they fall due, it doesn’t have to lead to closure. Once you speak to an insolvency practitioner or business lawyer, one of their objectives is to ensure the creditors get the best return possible.
In pursuit of that, the best course of action may be to put the company into a voluntary repayment arrangement. Company Voluntary Arrangements (CVA) involve the company continuing to trade while repaying the debts in affordable instalments. Administration may also be an option wherein a licensed insolvency practitioner takes control of the company, making the changes necessary to make the company appealing to potential buyers.
You’re barred from setting up any more companies
As director of an insolvent company, it might not look great on your CV, but unless you’re found guilty of wrongful or fraudulent trading, or you’ve failed in your duties as director, you are allowed to start a new limited company.
Depending on your circumstances, you may even have the option to continue the business in a new limited company, though there are restrictions around trading in a similar style to the insolvent company and using similar names. A licensed insolvency practitioner can provide you with more details and advice tailored to your situation.
You can liquidate your company yourself
While you can dissolve your solvent limited company, you cannot liquidate a company yourself, be it solvent or insolvent. Due to the complexity of doing so, you must speak to a licensed and regulated insolvency practitioner to put your company into liquidation.
While you can’t liquidate, you can strike the company off the register at Companies House if it is solvent. You can try and dissolve an insolvent limited company, but you must notify the company’s creditors, who are likely to object to the dissolution.
Directors of insolvent companies get criminal records
Some directors may not want to seek support with their company’s insolvency out of fear of tarnishing their reputation or, worse, getting them a criminal record. If this is you, rest assured that in the UK, despite what your creditors might threaten, you cannot go to prison for simply being the director of an insolvent company.
Once you do speak to a licensed insolvency practitioner, your details should be kept confidential. While it may not be easy to come forward and admit your company is insolvent, acting sooner rather than later gives you more chance of saving the company as well as more options for recovery or a controlled entry into liquidation.
As previously stated, if your company would be viable without its unsecured debts, you could repay your creditors at an affordable rate on a monthly basis. Companies can do this through a Company Voluntary Arrangement (CVA), which usually lasts five years, and once concluded, any remaining unsecured debt is written off.
While CVAs require approval from a portion of the company’s creditors, Creditor pressure is paused for the arrangement’s duration and allows the company to continue trading while repaying what it can afford.
Where more substantial action may be required, administration could be more beneficial, wherein a licensed insolvency practitioner takes control of the company and makes the changes necessary to return the company to a profitable state.
However, the company could be beyond saving and would be better off closing. In that case, you can control the entry into liquidation by entering a Creditors Voluntary Liquidation (CVL), which allows the company to close in an orderly manner before the creditors can apply for a winding-up petition and force the company into compulsory liquidation.
Company closure and insolvency can seem complicated, and myths around what can happen can be rife. If your company has debts it cannot repay, you can’t liquidate it yourself, and attempts at strike-off are likely to be objected to. Limited company debts seldom affect your personal finances due to their separation from the company unless personal guarantees have been signed.
Insolvent companies don’t have to close by default, though the insolvency practitioner may find liquidation is the best course of action depending on the company’s circumstances. You can set up more companies if one of yours fails so long as you haven’t committed wrongful or fraudulent trading. Similarly, you won’t receive a criminal record just for being an insolvent company’s director or speaking to a licensed insolvency practitioner for confidential advice.
You can’t liquidate a company yourself and should instead seek the advice of a licensed insolvency practitioner for tailored support and help in finding a solution best suited to your company.