Archive for February, 2011

Business Bankruptcy

Tuesday, February 15th, 2011

According to experts, 50% of businesses fail in their first year and only 20% survive past the four year mark.

It is a sad fact of life that so many businesses never really make it off the ground. And for new business owners, particularly sole traders, who invested substantially to make their idea work, choosing the path of bankruptcy is an all too real option.

Business bankruptcy or IVA?
In the case of sole traders, the business they own is intrinsically linked to them as an individual, so they are liable for all debts should the company fail. For individual bankruptcy, an Individual Voluntary Agreement (IVA) may be best step forward to getting back on your feet, and there are equivalent schemes for businesses.

Business bankruptcy legal advice
Bankruptcy should always be a last resort, and it’s highly recommended you consult a commercial bankruptcy lawyer for advice before going ahead with anything. In order to be declared bankrupt you need to go to court and convince a judge that given your financial situation bankruptcy is the best course of action. Bankruptcy can last for up to 5 years, but is usually set at 12 months by the court.

Going bankrupt
When you are declared bankrupt everything you own is sold to pay off your debts. For the duration of the bankruptcy your finances are controlled by a court officer called the Official Receiver. All of your income will be paid into your bankruptcy although you will be given a small allowance to cover your living expenses. Once the period set by the court has passed, you will be discharged from bankruptcy and whatever is left of your debt will be written off.
There are also quite a few penalties and restrictions imposed on individuals in bankruptcy. For example, you cannot:

  • Take any part in the promotion, formation or management of a limited company (LTD) without the permission of the court.
  • Trade in any business under any other name unless you inform all persons concerned of the bankruptcy.
  • Practice as a Charted Accountant / Lawyer.
  • Act as a Justice of the peace (JP).
  • Become a member of parliament.
  • Become a member of a local authority.
  • Obtain credit for over £250 without the permission from the lender.
  • Act as a company director.

In addition:

  • You may be publicly examined in court.
  • You lose control of your assets.
  • Your credit rating will be affected for many years after the annulment.


    What is insolvency?

    Tuesday, February 15th, 2011

    Despite the UK’s economic fortunes improving somewhat of late, hundreds of businesses are still falling into insolvency every month.

    According to credit firm Experian’s Insolvency Index, a total of 1,491 firms became insolvent in May 2010.

    Under UK business law, insolvency is defined in the Insolvency Act 1986 Section 123:

    123. Definition of inability to pay debts (i.e. insolvent)

      1. A company is deemed unable to pay its debts – […]
    1. (e) If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. (Known as cash flow insolvency.)

    2. A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. (Known as balance sheet insolvency.)

    If your business becomes insolvent it may be put into liquidation. This is where the assets and property of the business are redistributed to satisfy all claims of your creditors.

    The liquidation process can be instigated by the directors and shareholders of the insolvent business but the process will only be legally effective if there is a convening of a meeting of creditors where they can appoint a liquidator of their choice – known as creditors voluntary liquidation (CVL).

    Alternatively, a creditor can petition the court for a winding-up order which can place the insolvent business into a compulsory liquidation.

    Generally, the priority of claims on the insolvent company’s assets will be determined in the following order:

    1. Firstly, the costs of the liquidation are met out of the company’s remaining assets
    2. Secondly, the preferential creditors under applicable law are paid
    3. Thirdly, in many legal systems, the claims of the holders of a floating charge will be paid; other claims may also fit into this layer
    4. Fourthly, if there is anything left, the unsecured creditors are paid out proportionally in accordance with their claims. In many jurisdictions, a portion of the assets which would otherwise be caught by a floating charge are reserved for the unsecured creditors.
    5. In the very rare instances where the unsecured creditors are repaid in full, any surplus assets are distributed between the members in accordance with their entitlements.

    There are two insolvency procedures available to companies; these are Administration or a Company Voluntary Arrangement.

    Administration is a procedure designed to avoid, or at least delay, liquidation. Businesses in Administration appoint an Administrator, who must be a licensed Insolvency Practitioner, to manage the company’s affairs and protect the interests of creditors while restructuring the company so that it can continue as a going concern.

    One particular type of Administration is pre pack administration. This is where the Administrator immediately completes a pre-arranged sale of the business, often to its directors or owners, to enable a best price to be achieved and thus maximise the price of assets for the business’ creditors.

    Company Voluntary Arrangement (CVA)
    A CVA is a legal agreement between an insolvent business and its creditors where a fixed amount lower than the outstanding actual debt is paid to creditors. These payments are usually made on a monthly basis and remaining debts are written-off at the end of the agreed terms. The CVA is managed by a Supervisor who must be a licensed Insolvency Practitioner. If the CVA fails, the insolvent business is usually put into liquidation.