Bankruptcy For Small Businesses

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How to file bankruptcy for a small business?

Despite common misconceptions, bankruptcy only actually applies to individuals. In contrast, when registered or unregistered limited companies, including those based overseas, can’t pay off creditors the correct term is ‘insolvency’. This is irrespective of the actual ‘size’, i.e. how many employees work for the organization.

In contrast, self-employed people use the standard process of applying for individual bankruptcy, for which separate guidance is available. As such the focus here is purely on companies dealing with debt, with the intention to provide an overview on the various types of insolvency currently available to businesses trading in England & Wales.

Much like bankruptcy, insolvency comes in two main types. Broadly speaking these are voluntary and involuntary. If you suspect your firm may be at risk of failing there are two important tests that should be carried out first, and these boil down to balance sheet and cash flow. If the business owes more out than it owns, the balance sheet is showing signs of failure. Similarly, if the company cannot afford to meet all required payments, and is not making contributions towards its arrears, then it can also be considered as an insolvent firm.

If this is the situation then there are several options open to management. For organisations with a turnover of less than £5.7million it may be possible to apply at a court for a Company Voluntary Arrangement. This can keep the day-to-day running of the firm in the hands of its owners, and acts in a similar way to an Individual Voluntary Arrangement. In short then, if the directors submit particular documents it’s possible to avoid further action being taken, arrange for more manageable creditor repayments, and continue to trade, providing the creditors agree to the terms.

The directors must file a proposal for the arrangement (i.e. how the company will pay off creditors, and over what length of time), a statement of company affairs, statement of eligibility for the CVA, and a statement from a nominee in which the nominee declares: “The proposed voluntary arrangement has a reasonable prospect of being approved and implemented, and the company is likely to have sufficient funds available to it during the proposed moratorium period to enable it to carry on its business.”

If that isn’t suitable then another option would be to file in court for an Administration Order. In this instance administrators will step in to manage the firm once a petition has been successfully submitted, and in effect the organisation will be protected from any further action with regards to being wound up, unless the court approves it. As such the firm is given time to rectify its situation, rather than being liquidated. When a lender takes this kind of action against a company in bad debt it is known as administrative receivership.

The final option would be to go into voluntary or compulsory liquidation, wherein trading immediately ceases, the firm is wound up, and its assets sold to pay off outstanding balances. In this instance again an application needs to be submitted in court. For compulsory liquidations £1,000 deposit and £220 fees also need to be paid to the court. In addition to this, costs for advertising the petition in the London Gazette will also need to be covered. For voluntary liquidation the price varies depending on which practitioner you use.