What happens if a limited company goes bust?

Advice for directors of companies heading into liquidation

When a company can no longer pay its suppliers and other regular bills as they fall due, or it’s taken on excessive liabilities when compared with the value of its assets, the business may be insolvent.

If your limited company goes bust, your priorities as a director change and you must place the interests of your creditors first – namely, by not taking on more credit from suppliers nor increasing financial losses for your customers and other creditors.

How to check if your company has gone bust

There are three different tests for insolvency that will clarify the financial position of your company:

Cash flow test

If cash flow is poor and you can no longer meet supplier payments or pay your employees, it’s likely that you’re insolvent.

Balance sheet test

Balance sheet insolvency occurs when a company’s total liabilities, including contingent liabilities, exceed the total value of its assets.

Legal action test

This test takes into account legal actions that have been taken against the company, such as statutory demands or a winding-up petition. If legal action is underway, it’s a clear sign that the company is insolvent.

“Spoke with Chris who put me at ease straight away. He was very knowledgeable and listened intently to all my worries and concerns. Will definitely be using Real Business Rescue and advise anyone with business issues to give them a call.”

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Your duties as director of an insolvent company 

It’s vital that you cease trading if your company fails an insolvency test. This minimises further losses for your creditors, and helps you avoid accusations of wrongful trading should the company have to be liquidated.

Corporate insolvency doesn’t necessarily mean liquidation, however, and you should seek assistance from a licensed insolvency practitioner (IP) on how to proceed. There are various official rescue and recovery options available for insolvent companies, as well as informal measures you can take to improve business cash flow and return to profitability.

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Rescuing your company if it’s gone bust

Company Voluntary Arrangement (CVA)

If the company is deemed viable for the long-term by a licensed IP, a Company Voluntary Arrangement may be a good option. In this instance, the IP negotiates with creditors for a legally binding instalment plan that protects the business from closure whilst it trades out of difficulty.

Time to Pay (TTP) arrangement

Tax debts are a common reason why companies go bust, but it’s important to know that you may be able to repay arrears over time. HMRC runs a Time to Pay scheme and are able to offer eligible businesses extra time to pay without financial penalties, typically up to 12 months.

Alternative funding

It’s very difficult to obtain ‘traditional’ borrowing from a bank if your company is struggling financially, but there are alternative lenders who may be able to help. If you own valuable assets, for example, but are ‘cash-poor,’ a sale and leaseback arrangement could improve your working capital with a cash lump sum.

These are just three potential avenues to investigate if you believe your company has gone bust, but if the situation is dire and rescue isn’t possible, voluntarily placing your business into liquidation is the best option.

Liquidating an insolvent company

When a company declines and has to be liquidated, an investigation takes place into the reasons behind its failure. This is why as a company director, you need to be careful to cease trade and prioritise your creditors in order to avoid allegations of wrongful trading.

Voluntarily putting your company into liquidation demonstrates your intention to fulfil your legal duties to creditors, and can minimise the chances of being disqualified or held personally liable for business debts.

A CVL also offers you some control over the procedure, especially when compared with compulsory liquidation. Furthermore, if your business does have to be liquidated you may be eligible to claim director redundancy pay if you’ve received a regular salary under PAYE.

If you believe your company has gone bust, you should consider:

• Is the company officially insolvent? Seek professional insolvency help urgently to confirm its financial status and establish your best options
• Cease trading to ensure you don’t fall foul of stringent UK insolvency laws
• Gather together all relevant documentation and management information to provide a clear picture of the situation

Real Business Rescue are insolvency experts and will provide reliable professional guidance if your business is in decline. Please get in touch to arrange a same-day consultation free-of-charge.