My business is failing – what will happen?
It depends on the business’s legal structure. If you’re a sole trader or a partnership then you (and your partners) are personally responsible for your business’s liabilities. So, for example, if you can’t pay your tax bill then HMRC may seek to have you declared bankrupt, so your personal assets – including your house and car – can be sold to pay off your debts.
If your business is either a limited company or limited liability partnership (LLP) then you are not personally responsible for its liabilities (unless you have guaranteed or otherwise pledged personal assets as security for a business loan or debt).
There is a higher cost involved in managing a company or LLP than in running a sole trader or partnership business, but an owner’s home isn’t at risk if the business goes sour.
What is administration?
It is like an intensive care ward for companies, in which they have some legal breathing space to try to rescue them. While in administration, creditors cannot apply to the courts to have it ‘liquidated’ – i.e. where it is closed down and its assets sold to pay debts.
When is a company put into administration?
Usually its bank or directors will take the decision if they are worried that a creditor may push the company into insolvency by trying to get its debt paid immediately when the company is unable to pay what it owes.
How does administration work?
An administrator, who is a licensed insolvency practitioner, will be appointed to take control of the company and all its assets. Its first task will be to try to save the business.
It may negotiate a Company Voluntary Arrangement, in which creditors agree to be repaid (usually a smaller sum than they are owed) over time so the company can continue trading.
It may sell the company as a going concern, so trading carries on as usual but under new owners (or the old owner – see below). If the business can be turned around, then a sale is the preferred option.
If it isn’t possible to save a business then it will be put into ‘liquidation’ (also known as being ‘wound up’), where it stops trading in the ordinary way and its assets are sold to try to pay off creditors.
Can I buy my own business out of administration?
Yes, in fact it’s quite common for a company’s existing management or shareholders to buy it back. You tend to find that people with an existing interest in the business may often put in the highest bid, because they are in the best position to assess its true value.
Selling a business back to its old owners may seem like the best option to an administrator under time pressure to get the best result – even if creditors may be angered by the decision.
Sometimes the administrator does not have the funds to trade the business of the company, so sets up a sale to take place immediately on his appointment. Sales packaged prior to the administrator’s appointment are sometimes called, ‘pre-packs’, and those to the existing directors or shareholders are sometimes called ‘phoenix pre-packs’. There are special rules telling administrators what additional information must be given to creditors where pre-pack sales happen.
I’m facing bankruptcy – what will happen to my business?
It’s possible that you can agree a repayment plan with your creditors, known as an Individual Voluntary Arrangement.
If you can’t come to an agreement and you do business as a sole trader, then your company will be taken away from you, shut down and its assets sold to the highest bidder to pay off what you owe (as will your personal assets, such as your matrimonial home).
If you own a company or limited liability partnership then your personal creditors will only be entitled to the value of your shares in it. These will simply form the general mass of assets the trustee in bankruptcy sells as part of the bankruptcy process. Your personal creditors would not be entitled to a direct claim to the company’s assets.
My business partner has gone bankrupt – what will happen to our company?
It’s likely that a trustee in bankruptcy (a specialist accountant) will be appointed to sell your partner’s assets to pay off his or her creditors. If your business is a general or ordinary partnership (as opposed to a limited liability partnership) then you share personal responsibility for the business and it will have to be sold, with the bankrupt’s share going to the trustee.
If it is a limited company, then its other owners would tend to be the trustee’s first port of call to try to sell the bankrupt’s shares in the company – in fact you might be legally entitled to have first refusal on them. So, if you can raise the money, you could buy a partner’s stake in the company and continue trading.
Can I run a company if I’m bankrupt?
You’re not allowed to act as a company director or to ‘manage, form or promote’ a limited company while you’re bankrupt, unless you have explicit court permission. If you don’t, you are breaking the law.
You can be a sole trader but you must trade under your own name or the name by which you traded when you went bankrupt. You must also tell those you do business with that you are bankrupt.
How long does bankruptcy last?
In the UK, bankruptcy normally lasts for one year, unless extended by the court.
I/ my business is facing financial difficulties – what should I do?
Don’t stick your head in the sand. If you or your business are struggling financially then you need to act quickly – don’t leave it too late. There are specialist accountants out there that can help turn your business around. However, every plan requires some time, and so the earlier you speak to them the better. Once the business goes into [an administration] process, there is very little that can be done to help.
Find out more about Clyde & Co