How A Limited Company Can Deal with A Post-Bankruptcy Situation?
When a company goes bankrupt, the business cannot make further payments or invest.
However, a business’s incapability to pay off bills, unpaid emergency rent loan bad credit, pending salaries/wages and carrying out any business expedition owing to a shortage of funds is known as insolvency. Insolvency and bankruptcy differ from each other. Bankruptcy is a term used to associate a company that cannot pay bills. Insolvency is a situation the company is undergoing through.
When a business enters insolvency, it still has many routes to get out of the situation. With bankruptcy, one shares limited or no freedom to do anything. Businesses file for bankruptcy to resolve their debts and start again.
In this, both the business and the business owner go bankrupt. One can hardly distinguish between a business and the owner of a limited company. The business holds separate cash accounts from the owners. If a business goes insolvent, the business owner’s finances remain unaffected.
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What are potential signs of a Limited Company Bankruptcy?
A limited company becomes bankrupt when:
- It delays and ultimately cannot pay off the dues
- The liabilities exceed the assets
- The business share high statutory demand or CCJs (County Court Judgements)
- No cash flow or capital to pay off staff
- The business lacks reliable information regarding business management
- Too many borrowings with no personal guarantees
If you can relate to the 4-5 signs mentioned here, the company may face legal actions from authorities in power.
What Chain of events follows post limited company Bankruptcy?
When a company goes bankrupt, the responsibility curve shifts entirely. Instead of prioritizing the interests of shareholders while running the company, maximize the profits for creditors. It implies one should do everything one can to limit the liabilities to the creditor.
It is essential to seek expert advice almost immediately because, in bankruptcy, a licensed insolvency practitioner takes control of the company’s finances and distributes the funds to creditors. In this, personal liabilities will not be accounted for.
Personal guarantees for business could further affect the outstanding balance you owe. The officer carries out an investigation post-business asset liquidation and reports the findings to the Secretary of the state.
Thus, if you do not act immediately in the best interests of your creditor while running an insolvent business, you could be held liable for the company’s outstanding debt and banned from business operations for up to 15 years.
However, bankruptcy does not mean the business is doomed to fail. Depending on the company’s financial position, certain options can help act out immediately.
What to do when a company runs into bankruptcy?
As you know, if you are heading insolvency or have already hit the mark, talk out the things with your creditors. Prioritize the move when bankruptcy hits.
Failing or postponing the same will add tension to the table. Cease trading with an immediate effect. It is vital to seek expert advice in this crucial stage. As a director of an insolvent company, you must not breach the code of responsibilities.
Seeking professional insolvency advice will help you identify the right action to take with an immediate effect.
It will help one delve deep into personal circumstances and churn out potential options accordingly. A piece of expert advice in bankruptcy can help one avoid serious issues that may affect the business’s finances for a long. For example, you may safeguard your finances and prevent uncontrollable debt from rising.
How to rescue your company from bankruptcy Potentially?
Apart from talking out the things with creditors and seeking a piece of expert advice, you can take the below actions in bankruptcy.
1) Check out Individual Voluntary Arrangement (IVA)
The government introduced IVA as a potential alternative to bankruptcy. IVA is an agreement with your creditors that involves paying off the complete amount. It bases affordability as the criteria for businesses to pay off funds. It enables you to pay a realistic amount to the creditor. It lasts for 5 years. Thus, if you want to file for IVA, you must share a minimum of £5000 eligible business debt.
After the agreement is approved, the creditors can’t force you into paying money for 5 years. It promises to write off any outstanding balance at the end of the IVA agreement.
2) Explore eligibility criteria for CVA (Company Voluntary Arrangement)
A Company Voluntary Agreement is a procedure or an arrangement that allows the company to:
- settle debts like pre approved personal loans bad credit by paying only a proportional amount.
- To enter into a suitable arrangement with creditors to pay off debts
It helps the company continue trading with no potential threats of liquidation. The CVA is a contract for everyone involved in the business. From creditors to investors. It eliminates any pressure or possibility of legal actions against the firm. The proposal outlines the complete debt amount a business will pay to creditors by the end of the agreement.
It is an impactful way to make your company in 5 years or fewer. Post completion of the agreement the creditor write-off the debt.
3) Analyze and communicate with HMRC Time to pay arrangement
These arrangements are structured payments for tax repayment for a decided time. The agreement is between the business and the HMRC to help the company sort finance with extreme difficulty.
HMRC acts in the business’s best interest to assist in certain circumstances. In the light of Coronavirus, HMRC helped businesses fight-off struggles.
If a company cannot pay taxes on time, HMRC can help them out meet an arrangement that offers debt payments in instalments. With a TTP (Time to Pay arrangement), you can repay debts to HMRC in monthly instalments. This period lasts for 12 months.
If you find it extremely challenging to pay off debts or expect that you may not pay the same in the near months, informing the HMRC of the same is ideal. While requesting more time to pay off debts, describe repayments you can afford to pay and the reason too.
HMRC do not accept an application that lacks the credibility or potential for repayments. Refrain from offering to pay over what you can. It may lead to rejection upfront.
Therefore, let HMRC regulate the whole procedure, from identifying the eligibility and affordability of the businesses to paying off the debt to defining the repayments. The representative will assist you in understanding your rights and penalties if you fall into the arrangement.
HMRC do not break the agreement even in crucial circumstances. However, it is critical to remain true to your word. If you falsify the information or evidence, HMRC may end the agreement.
*HMRC agreement is only for the firm in temporary financial distress. It is for the businesses that share the potential for future viability. If the creditor has taken the lead post-bankruptcy or the company is insolvent, you may not qualify for the HMRC arrangement.
What If a Business Wants to Close the Company Altogether?
If a director or the owner dissolves or closes the company, it will not be a part of the Companies House Register anymore.
If the owner runs clear of any legal accountabilities, he can operate as the owner of a different company.
However, one may not have a company with the same name or similar name.
Thus, this is how the bankruptcy procedure works. If you are a limited company facing post-bankruptcy issues, these solutions will help you get out of the same.
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