If your company is struggling to repay its debts as and when they fall due, it’s easy to feel concerned that its debts may affect your personal finances too.
Fortunately, there are ways for you to manage your company’s debts so they don’t impact your personal finances and formal processes to help limit their effects on the company.
Limited company insolvency and “company bankruptcy”
In the UK, a company can’t “go bankrupt”, though the term may be used informally. Bankruptcy applies to sole traders and individuals, while US-based companies can enter one of several bankruptcy ‘chapters’.
When is a company insolvent?
Your company is insolvent when it can’t repay its liabilities or when the company’s debts outweigh the value of its assets.
You should be aware of your company’s solvent position, which you can check by monitoring its cash flow and balance sheet and checking for legal action, including County Court Judgments (CCJs) and Statutory Demands, which can negatively affect your company’s credit rating and lead to creditors attempting to wind up the company.
Personal liability if you close your company
Limited company directors benefit from limited liability protection, separating them from the company’s finances. If you’ve acted lawfully as director, in most circumstances you shouldn’t be held personally liable for the company’s debts.
However, there can be exceptions:
- You’ve signed personal guarantees
- You continued trading while insolvent
- You’ve engaged in wrongful or fraudulent trading
- You have an overdrawn director’s loan account
How should I close my insolvent company?
The best option for your company depends on its circumstances and whether you’d like to continue afterwards.
- Repay unsecured debts in instalments
If your company’s debts are obstructing an otherwise viable business model, you could apply to put the company into a Company Voluntary Arrangement (CVA). These allow your company to repay a portion of its unsecured debts while it continues trading. This could maintain goodwill with customers and some creditors and retain your company’s place in the market.
A licensed insolvency practitioner (IP) can assess your situation and clarify whether repaying your unsecured debts would be a feasible solution. - Restructuring the company
If there’s a chance of rescuing the company as a going concern or of achieving a better outcome than through liquidation, administration might be a more appropriate option.
Administration protects the company from creditor pressure with an IP acting as administrator, investigating the company’s financial standing and outlining a restructuring or rescue plan.
- Close the company through voluntary liquidation
Liquidation may be your best option where recovery isn’t feasible, its debts are unmanageable, and creditor pressure is increasing. Entering a Creditors Voluntary Liquidation (CVL) leads to the company’s closure, drawing a line under its debts. This allows you to move on or to start afresh.
All these processes are formal insolvency procedures and can only be carried out by a licensed insolvency practitioner. Taking advice from unlicensed advisers puts you at risk of poorer quality service, hidden costs, lack of transparency, and improperly executed proceedings.
In summary
Incorporating your business gives you limited liability protection, separating your company from your personal finances so you won’t go bankrupt as a direct result of your company’s debts unless you’ve acted outside of its best interests as director.
Even without the threat to your personal finances, you should act immediately if your company is insolvent. Speak to a licensed and regulated insolvency practitioner to ensure you’re taking the best route forward.
That best route might involve repaying the unsecured debts in affordable, monthly instalments, restructuring the company back to a profitable state, or voluntarily closing it, allowing you to start afresh.