Home Budget 2007 Company Profile Services Accountancy Zone Business Zone Tax Zone IR35 Update News Articles Feedback Search Legal Notice How To Find Us Money worries Let's hope it never comes to this. But prompt action may enable you to avoid insolvency if you do find yourself in difficulties (or if you have a customer going bankrupt). Much better to know something about it from the start. The Insolvency Service is the Government agency which administers and investigates the affairs of bankrupts and companies in compulsory liquidation under the Insolvency Act 1986. It has a number of useful leaflets, available from Insolvency Service Publications, including A Guide to Bankruptcy and A Guide for Creditors. Insolvency practitioners are listed in the Yellow Pages as such and often offer free initial consultations. However, other organisations also offer insolvency advice not all of whom are well-qualified to do so. Be wary of cold calls by post or telephone particularly. A useful Internet web site can be found at http://www.insolvency.co.uk. The different types of insolvency procedures available depend on how the business is set up: Bankruptcy only applies to individuals Compulsory liquidation (winding up by the court) applies to companies and partnerships. However, a range of alternative ways of dealing with insolvency have been developed, many of which may enable you to continue in business. The Government is currently conducting a review of the bankruptcy and insolvency laws. Bankruptcy You lay yourself open to bankruptcy proceedings if your financial position deteriorates so much that you are unable to pay your unsecured debts, or where it appears that there is no reasonable prospect that you will be able to pay a debt in the future. A creditor may, if you owe him or her at least £750 as an unsecured debt, serve on you a formal demand, requiring you: To pay the debt; To give security for it; or To compound for the petition debt, in other words, to propose an arrangement with the petitioning creditor, so that the debt can be paid off under an agreed scheme of payments. If the debt is a future debt, the demand will require you to establish to the reasonable satisfaction of the creditor that you will be able to pay the debt when it falls due. If you do not comply with the demand, or make an application to a bankruptcy court (the High Court in London or certain specified county courts) to set aside the demand (for example on the grounds that the money is not due, or that you have a claim against the creditor that equals or exceeds your debt to him), the creditor may, after the expiration of 21 days (or even earlier in exceptional cases), file a bankruptcy petition in a bankruptcy court. The bankruptcy petition will be endorsed with the day and time of the hearing, and must be served on you personally. There is another way for a creditor to start bankruptcy proceedings (though a petition for bankruptcy is still required). When a debt is payable immediately, and the creditor can show the court that you have failed to pay, that creditor may ask the court for a bankruptcy order. The court has a discretion whether or not to make a bankruptcy order on the petition but will probably do so unless you: Have paid off the debt Can show that the debt is not due Can show that there are sums owed to you by the creditor, which equal or exceed the debt due to him or her Can show that you have made a proposal to compound or secure the debt, and that the creditor has unreasonably refused such proposal If the debt is a future debt, can satisfy the court that there is a reasonable prospect that you will be able to pay the debt when it falls due. All your assets (subject to very limited exceptions) are vested in your trustee in bankruptcy. The Official Receiver (part of the Insolvency Service) will act as trustee unless an insolvency practitioner is appointed. Your assets include your home, and the trustee can seek an order for possession (if it is owned solely by you) or possession and sale (if it is owned jointly). The court must take into account, in considering whether or not to make such an order, the legal rights of your spouse and children to live in the home. But, once one year has elapsed from the date of the trustee’s appointment, the court assumes (save in exceptional circumstances) that the rights of the creditors outweigh all other considerations. During bankruptcy you have a duty to complete a statement of affairs if this has not already been done, giving full details of your debts and assets. It will also assist the Official Receiver and your trustee in ascertaining your assets and getting them in. You may be required to attend a public examination, at which you will be questioned about the reasons for your insolvency and your dealing with assets. Your trustee may apply to the court for an order requiring you to make regular payments out of your income towards payment of your debts. You may be committing an offence if you fail to disclose your assets fully, or otherwise fail to co-operate with the trustee. Under the Insolvency Act 1986, it is a criminal offence not to have kept proper accounting records of your business. It is also an offence if, during the same business period, you have materially contributed to or increased the extent of your insolvency by gambling or rash and hazardous speculation. You commit an offence if you obtain, either alone or jointly, credit for more than £250 without disclosing the bankruptcy or engage in business under a name other than that in which you were made bankrupt, without disclosing to the people with whom you’re trading, the name in which you were made bankrupt. Also, under the Company Directors Disqualification Act 1986 it is an offence (except with the court’s permission) for a bankrupt either to act as a director or to be concerned in the promotion, formation or management of a limited company. Unless you have been bankrupt previously or the court otherwise orders, you normally remain bankrupt for three years (two years if you filed your own petition for bankruptcy and your unsecured debts are less than £20,000) and you are then discharged from the disabilities of a bankrupt. On discharge, your assets in the bankruptcy remain vested in your trustee, who is able to sell them to pay off your debts, and they remain so vested in the trustee until all your debts are paid in full and the bankruptcy order is annulled. Although the discharge releases you from most of your bankruptcy debts, you remain liable for certain debts, including any court orders in family proceedings, such as maintenance. Compulsory Liquidation A company is insolvent if either: Its assets amount to less than its liabilities; or It cannot pay its debts. A petition is presented to the court, normally by a creditor, stating that the company owes a sum of money and that the company cannot pay. You can apply to cancel or review the winding-up order, but this must be done within seven days. When the court makes a winding-up order, the matter is put in the hands of the Official Receiver. The Official Receiver will notify creditors and others with an interest, and will usually visit your premises: any employees (including you, if you are one) will be dismissed. It is very unlikely that trading will continue. You will no longer have control of the company's business, assets and property, but your duties and responsibilities as a director will continue (for example, you may have to help dispose of assets). If there are significant assets, an insolvency practitioner may be appointed to act as liquidator. The liquidator realises the company's assets, pays the fees and charges arising from the liquidation and shares out any remaining funds to creditors and (very occasionally) shareholders. When the winding up is complete, the company will be dissolved. As a director of a company that has been wound up by the courts, you will be interviewed by the Official Receiver at some stage, and must provide a statement of your affairs. You may be required to contribute to the company's assets if you have misapplied company funds or if the company has traded wrongfully or fraudulently. Wrongful trading may apply if the court thinks that you knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid insolvency, and that you failed to take every step to minimise the potential loss to the company's creditors. If you are a shareholder, you may be asked to make a payment for any shares that have not been fully paid up. And, if you have guaranteed any of the company's debts, the creditor may ask you to pay them off. If you cannot pay these debts, then you personally may be forced into bankruptcy. The liquidator or Official Receiver must send the Department of Trade and Industry a report about all directors who were in office in the last three years of the company's trading. An application can be made to the courts to disqualify you from being a director for any period between 2 and 15 years, if: Considered guilty of misconduct; Regarded as unfit to be a director (for example, if you indulged in wrongful trading, failed to keep proper records or failed to co-operate in the liquidation) Unless you are disqualified or made bankrupt, you can still act as the director of another company. However, for 5 years after the winding up you cannot be involved in another business with a name so similar that it suggests an association with the failed company. Admin Orders Individuals If you are in business as a sole trader, your debts are less than £5,000 and there is a county court judgement for at least one of the debts, you can apply to that court for an administration order to be made. Such an order will provide for all your debts (whether or not there are court orders relating to them) to be paid by single weekly or monthly payments to the court. The court will accumulate the payments and distribute them to your creditors pro rata, from time to time. Provided that you keep up such payments, no steps can be taken to enforce the debts by other means. If you have no prospect of paying off all your debts within a reasonable time, the court can, on your application, order that you pay only a limited percentage of your debts. Companies/Partnerships Either the failing company (or partnership) itself or the creditors can apply to the court for an administration order if there is a chance that the business can be saved as a going concern, or sold for more than would be raised by liquidation. If the court is satisfied that the business cannot pay its debts (or is likely to become unable to), an insolvency practitioner is appointed as administrator, either to sell the company or put into effect a rescue plan. The effect is to give the business a breathing space: while the company is in administration, the creditors cannot take legal action to wind up the company or appoint a receiver. Administration is not the same as being placed "in receivership". An administrative receivership applies only to companies and the court is not usually involved. Instead, a major creditor (usually a bank) appoints an insolvency practitioner as receiver, to recover money owed to it. The receiver does not make payments to unsecured creditors. Voluntary Arrangements The Insolvency Act 1986 provides for voluntary arrangements to be made with your creditors, by enabling you to apply for approval of a scheme whereby your debts are cleared by an offer to creditors made with the assistance of an insolvency practitioner. Voluntary arrangements of this kind can be made by individuals, partnerships or companies. After seeing an insolvency practitioner, you must first of all apply to the court for an interim order. In your application you must name a qualified insolvency practitioner who will help you to prepare the proposal for a voluntary arrangement. If the court then makes an interim order, this will have the effect, during the period for which it is in force, of stopping any other legal proceedings against you or your property without the leave of the court. Once the interim order is in force, the insolvency practitioner will enquire into your debts and report to the court on your proposal for a voluntary arrangement, having normally first discussed the position with you fully at an interview. If the court is then satisfied that a meeting of your creditors should be summoned to consider your proposed arrangement, the interim order will be extended, and creditors will be given the opportunity to consider the proposal at the meeting. If over 75% in value of the creditors present and voting at the meeting, either in person or by proxy, approve the proposal, it will be binding on all creditors who were notified of it. The named insolvency practitioner, or another chosen by creditors, will then supervise the arrangement. If such an arrangement is then made and honoured, you will avoid bankruptcy or compulsory liquidation and the restrictions and publicity which go with it. If your creditors do not approve the scheme, then the interim order will lapse and any creditors can take steps to enforce the debt. [ Business Zone Home · Previous - Supercharge Your Sales And Marketing Operation · Next - Pricing For Profit ]