It's insolvency, not bankruptcy
There are many misconceptions surrounding business bankruptcy in the UK, but contrary to popular belief, bankruptcy only applies to individuals. When businesses are struggling with bad debts and are unable to pay their creditors, the term ‘insolvency’ is used, regardless of a company’s size.
None of the following options apply to sole traders who can follow the standard procedure of applying for personal bankruptcy. However, if you own a limited company that’s struggling to pay off debts, there are various types of insolvency you can apply for when trading in the UK.
Types of insolvency
There are two main types of insolvency: voluntary and involuntary.
If you’re looking to file for insolvency, you’ll probably be able to apply for a Company Voluntary Arrangement via the courts. Doing this will allow you to keep your business running and is similar in some ways to an Individual Voluntary Arrangement.
By submitting the necessary documents, your business could avoid any further action and steps can be taken to arrange a better way to manage your debts and repayments to creditors while you continue to trade. In order to achieve this, your company’s directors will have to file a proposal detailing a payment plan, along with details of the company’s affairs, a statement of eligibility and a further statement from a nominee.
An Administration Order is also a possibility and will require a submitted petition before administrators can take over the management of the firm. This will protect the company from further action unless previously approved by a court, while the firm endeavours to rectify the situation to avoid liquidation. A lender can also take this action against a company, which will result in administrative receivership.
Your very last option is to opt for voluntary or compulsory liquidation, which requires your company to cease trading immediately and all the assets to be sold in order to pay outstanding debts. For this to happen, an application would need to be submitted via the courts. Depending on which option applies to you, you may also have to pay fees.