As one of our most popular articles we have updated this for 2016.
Bankruptcy is a major problem for current or potential company directors. If you are struggling under the weight of debts and are considering bankruptcy as a solution, it is vital that you understand the implications for your business.
Personal insolvency peaked after the recession, but unmanageable debt remains a significant problem for thousands of people across the country – many of whom run their own business. So what would bankruptcy mean for you as a self-employed person?
What are the implications of bankruptcy?
Bankruptcy has a series of significant implications for your financial and legal future. Far from the ‘easy way out’ that it is sometimes perceived to be, bankruptcy is in fact a major decision that should not be taken lightly.
As well as forfeiting control over your assets, as an undischarged bankrupt you will find it very difficult to secure credit for many years. Just as importantly, your ability to operate in business will be severely curtailed.
So I can’t be a company director?
No. You cannot be a company director while your bankruptcy remains undischarged. Furthermore, you are legally prohibited from managing, forming or promoting a limited company unless you have the explicit permission of the court.
It is vitally important that you understand and abide by these limitations. If you attempt to become a company director while your bankruptcy is undischarged, you will be breaking the law. Once your bankruptcy has been discharged, you are free to become a director again.
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What if I’m already a company director and am then declared bankrupt?
Problems often arise when a company director is declared bankrupt. Your course of action will depend on your circumstances, and the nature of the company.
If you are the sole director of a limited company, your company will be wound up. The Official Receiver may take responsibility for liquidating the company and selling its assets, or the court may appoint an insolvency practitioner to do this.
Many company owners try very hard to avoid bankruptcy for this very reason. It is worth noting that you are free to appoint another director before bankruptcy proceedings begin if you wish for the company to continue. Remember, though, that you are prohibited from managing or promoting that company until your bankruptcy is discharged.
If the company has multiple directors, you should inform them immediately and resign your position. You can do this by completing Form 288a and returning it to Companies House.
Can I operate as a sole trader?
Yes. Although you may not act as a company director, you are free to operate as a sole trader. There are, however, important restrictions by which you must abide.
You are required to trade under your own name, or under the name by which you traded when your bankruptcy was declared. This requirement is waived only if you inform all related parties of your bankruptcy – which is, generally speaking, unrealistic.
Another director of my company has been declared bankrupt. What should I do?
It is not uncommon for company directors to become bankrupt and fail to notify the other directors. If you find that a director has become bankrupt but they refuse to resign, the next step depends on the bankrupt individual’s shareholding.
If the bankrupt director’s shareholding gives them less than 50 per cent of the voting rights in the company, they can simply be removed by a motion passed by the other directors. If the bankrupt director’s voting rights are 50 per cent or more, the situation should be reported to the Official Receiver. They will then take the relevant legal action.
What are the alternatives to bankruptcy?
As can be seen, bankruptcy can seriously curtail your ability to operate in business. It is therefore unsurprising that many current or prospective company directors choose to seek alternative ways to deal with their debt.
The most obvious alternative is an Individual Voluntary Arrangement (IVA). This is a formal alternative to bankruptcy that involves borrowers making a binding payment arrangement with their creditors. IVAs are significantly more flexible than bankruptcy, and enable the borrower to continue to trade.
It is also worth noting that you may be able to reduce the burden of repayments simply by negotiating with your creditors. If you find yourself in financial difficulty you should contact them sooner rather than later in order to head off potential problems.
If you are in any doubt you should seek independent financial advice. The Citizens Advice Bureau offers free support to those considering bankruptcy or its alternatives.