What happens when a business goes bust?

With an increase of businesses struggling throughout the pandemic, we’ll explore the process of what happens when a company goes bust…

In the UK, 60 percent of businesses fail within three years of launching, and many require the help of insolvency solicitors to get them through.

businesses

Just like there are different kinds of businesses, there are different processes which will come into a play when a business fails. Keep reading to find out what happens when a business goes bust…

The difference between bankruptcy & insolvency

First things first, it’s important to know the important differences when it comes to a business going under.

Bankruptcy is when a sole trader, i.e. a business which is owned and run by just one person, fails, and the business results in bankruptcy. This means that, by entering a legal process, the business will be relieved of some or all of its debts, and will then cease to trade.

Insolvency is when a limited company fails, and it will enter a state of insolvency. A limited company is one in which the members or owners have limited liability for debts accrued. This is usually limited to what they have invested or guaranteed to the business, and is essentially a safety barrier for these members.

Insolvency quite literally means that the company has no money and is, therefore, unable to pay its bills or its employees.

When a sole trader goes bankrupt

For sole traders whose businesses have ceased to operate efficiently and make money, the common route is bankruptcy. In this situation, the trader will file for bankruptcy meaning that your business will cease to trade and will close a legal process.

Once bankruptcy is complete, a sole trader can continue or restart their business as long as they use a different name. They may also begin trading as a freelancer which operates under much simpler rules. Filing for bankruptcy costs £680, and meeting this expense is the responsibility of the sole trader.

When a limited company becomes insolvent

A limited company becomes insolvent when it is no longer able to meet its financial responsibilities. This includes paying company salaries and invoices from creditors or providing products to customers.

When a business reaches this stage, the first and most important step, is to minimise the losses to creditors. This will often mean making a decision as to whether to keep trading or to close immediately.

In some instances, immediate closure is advised in order to prevent further debt. However, in other cases, you may be advised to continue for a short period in order to try to recoup part of the losses (think in terms of a high street furniture shop having a closing down sale).

Your next step will be to appoint a licensed insolvency practitioner. These are professionals who will take over your business in order to figure out whether the company needs to be closed or not. There may be an alternative to closing, including alternative funding and buyout.

Alternative funding before insolvency

Merger

The insolvency professionals (also known as administrators) may be able to help you to secure new investment or funding which you can then use to rescue your business from becoming one of the statistics we mentioned at the beginning of this article.

The administrators will discuss these options with you in order to try to find a solution for your business.

Buyout

The administrators may, in some cases, find a new buyer for your business. This will often be a business in the same industry as yours that can be incorporated with your business.

In this instance, the new company may decide to offer new employment to any staff working for the purchased company. In other cases, all those staff may be made redundant.

The process of liquidating a business

If, unfortunately, the above options have been unsuccessful, the administrators will begin the process of liquidating the business. This will include taking full control of the company and its assets, and will usually involve the selling of any assets.

Any money from selling assets, such as products or furniture, will be used to pay creditors. With a limited company, the business is treated as a separate legal entity from its owners or directors. This is important as it means usually the directors or owners will not be held liable for the repayment of the company’s debts.

In the event that the company goes into liquidation, the company’s employees will immediately be made redundant. This means that they no longer have a job and will need to apply, via the administrators, for redundancy pay. In most cases, employees will receive payment or part payment of any salary and holiday pay which is owed to them.

Support local businesses from going under…

When a business fails, it can be an extremely stressful time for its owners, employees, stakeholders and investors. For business owners who find that they are no longer able to meet their financial obligations, it’s important to act quickly and to seek professional advice to avoid allowing the problem to become worse.

Failing to act once a business becomes insolvent can, in some cases, result in personal liability for the company’s owners.


Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained business or financial professional. Be sure to consult a business or financial professional if you’re seeking advice about your business finances. We are not liable for risks or issues associated with using or acting upon the information on this site.