Avoiding bankruptcy and winding up
If the answer to any of the following questions is 'yes', a company director and/or company are at serious risk of being presented with a bankruptcy and/or winding-up petition:
- Are there difficulties paying debts as and when they fall due?
- Are there one or more creditors chasing payments?
- Has an undisputed Statutory Demand or County Court Judgment been handed down against the company?
There are at least six main reasons why a bankruptcy and/or winding-up petition should be avoided:
1. All trading must cease
The Insolvency Act 1986 requires that an 'insolvent' company (a company that is unable to pay its debts) must discontinue trading immediately. To do otherwise may be interpreted as wrongful trading, which can attract stiff penalties in the form of director disqualification or contributory repayments.
2. Directors may be held personally liable
One of the advantages of opening a limited liability company is to avoid personal liability. However, if an insolvent company continues trading, directors may be held personally liable for any debts incurred during this period. Moreover, they could be disqualified from serving as a director for up to 15 years.
3. Adverse publicity
A winding-up petition is advertised in the London Gazette (not less than seven days before the hearing date). This is potentially damaging to the company because creditors, customers and other interested parties will have knowledge of the company being in the middle of formal bankruptcy proceedings. Customers will be aware that the company should discontinue trading and may go elsewhere rather than awaiting the result of the petition hearing.
4. Frozen bank accounts
Banks routinely review the Gazette. When a company name is identified, all of its accounts are frozen - denying access to funds to pay creditors, employees and HMRC.
5. Cost of disputing a winding-up petition
A valuation order can suspend a winding-up petition. To obtain a valuation order, the company must prove that it has adequate funds to pay certain debts (such as wages) and the court will only permit funds to be made available for these purposes. However, the costs of obtaining a valuation order are prohibitive.
How can a business avoid insolvency?
A company can avoid insolvency by following these simple steps:
- Do not let debts exceed income
- Maintain a watchful eye on cash flow
- Use the most appropriate business structure
- Incorporate sufficient credit control mechanisms
- Exercise caution before offering personal guarantees for business loans.