There’s a lot to think about when it comes to insolvency and liquidation. It can be tricky to understand all of the different aspects. In this blog, we’re letting you know about bankruptcy vs liquidation.
Is insolvency the same as bankruptcy?
Insolvency is not the same as bankruptcy, although they are both associated with being unable to pay your debts.
Businesses can become insolvent when they are struggling with financial difficulties. Being insolvent can be defined as being unable to pay debts when they fall due or your liabilities being worth more than your assets.
On the other hand, bankruptcy is a legal process that begins when you personally cannot pay your debts. When you open a limited company, you are a separate legal entity to it. This means that you are not usually responsible for the company’s debts. However, there are some instances where you can be made personally liable for the company’s debts.
When will I be made personally liable for company debts?
Company directors must be wary of the actions they take that may lead to personal liability so that they can be avoided if possible.
Personal guarantees
A personal guarantee is a contract between a director and a creditor. It essentially acts as a security for the creditor that if the limited company cannot afford to pay the debt back, then the director is liable to step in.
Personal guarantees are usually best avoided as it’s very unlikely that you’ll be able to get out of paying them if your company begins to struggle financially.
Wrongful trading
Upon entering liquidation, the insolvency practitioner will be assessing your conduct as a director for at least three years leading up to the insolvency. They will also need to assess the conduct of any previous directors who have left the company in the last three years.
They will be looking for evidence of wrongdoing, such as preference payments, selling the company’s assets undervalue, taking money from customers with no intention of completing the work and more.
The insolvency practitioner will assess the severity of the wrongdoing, and you will have to face the consequences. These consequences can be personal liability, fines and even prison sentences if the wrongdoing is very serious.
Overdrawn directors loans
Many directors use directors’ loans within their companies. It’s only if a business ends up in liquidation that it can become a real problem. When the account is in debt, it means that the director owes the company money. In contrast, when the account is in credit, it means that the company owes the director money.
If you enter liquidation with an overdrawn directors’ loan, you will be responsible for paying it back. Please don’t panic; in most cases, you will be able to come to some kind of settlement with the insolvency practitioner and get some time to pay it. It’s very important that your insolvency practitioner has checked whether or not you have an overdrawn loan account before you appoint them. Make sure to get all liquidation costs in writing; otherwise, you may end up being pursued for much more money later down the line.
Unfortunately, we speak to many directors who have used other insolvency practitioners who were promised a £4000 liquidation, but they are now being asked to pay much more due to their overdrawn loan. This can be a very worrying situation for directors who have already been through the stress of liquidation.
What are the main differences between insolvency and bankruptcy?
Aside from insolvency being used mainly for companies and bankruptcy being used for individuals, there are some other differences.
Insolvency that leads to liquidation can be a permanent end to a company. Eventually, liquidation leads to the company being removed from the Companies House register.
In contrast, bankruptcy is not a permanent state. It usually lasts for between one to three years before the finances are recouped.
What happens if I become bankrupt?
Personal bankruptcy can be very stressful, and it’s important that you seek professional advice so that you can be clear on what’s expected from you when facing personal insolvency or bankruptcy.
When you become bankrupt, you have no way of paying back your creditors. Therefore, you will be required to sell your non-essential personal assets to pay back your creditors. A licensed insolvency practitioner will take care of all aspects of the sales and will communicate with your creditors, taking the pressure off you regarding the business’s debts.
You can face a bankruptcy order by the courts, or you can register yourself for the order. You will need to fill out forms, complete a statement of affairs and pay fees when starting the bankruptcy process.
What happens if my company becomes insolvent?
If your company becomes insolvent, you should seek professional advice as soon as possible. Seeking advice early will reflect positively and hopefully give you a better outcome.
There are various liquidation procedures available to you, depending on your current circumstances.
Creditors voluntary liquidation
A creditor’s voluntary liquidation, or CVL, is the most common form of liquidation. A CVL is a voluntary insolvency procedure when a company is struggling with creditor pressure.
Usually, when a company director has committed no wrongdoing, the company’s unsecured debts will be written off in a CVL.
Members’ voluntary liquidation
A member’s voluntary liquidation, or MVL, is used by solvent companies that have enough money to pay off their company’s creditors over time. These companies will work with the insolvency practitioner to pay creditors what they are owed.
Compulsory liquidation
A compulsory liquidation is best avoided if possible, as it is forced upon companies by their creditors. This does not reflect positively on directors as they have not acted within their duties by seeking advice early.
Directors often have less control and increased scrutiny when they are forced into compulsory liquidation.
We hope this blog has been helpful regarding bankruptcy vs liquidation. Remember that you don’t need to suffer alone with liquidation and bankruptcy. At Director First, we can offer you honest and accurate advice regarding your personal circumstances. Get in touch with us today for expert, independent advice regarding insolvency, bankruptcy and liquidation.
I'm Chris Worden, Managing Director at Director First. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice.
