Can I run a business while bankrupt?
Bankruptcy should never be taken lightly and can impact multiple areas of your life, whether youre an individual or you run a business or limited company. As an individual, your whole life changes once you declare bankruptcy, but thats also the case within any businesses youre involved with. From employees to suppliers, bankruptcy can be far-reaching.
To start exploring how bankruptcy affects businesses, lets take a look at what bankruptcy is.
What is Bankruptcy?
There are three ways in which you can go bankrupt:
- You declare yourself bankrupt because you can no longer pay your debtors;
- Your creditors apply to make you bankrupt if you owe over £5,000
- An insolvency practitioner makes you bankrupt because youve broken the terms of an Individual Voluntary Arrangement (IVA)
Bankruptcy should be seen as a worst-case scenario, and you should attempt all other forms of debt management before you apply for bankruptcy. However, if you need to apply for bankruptcy, you need to understand that there are serious consequences.
Does bankruptcy affect company ownership?
If you declare yourself bankrupt, you cannot be a company director of our own company or any others while the bankruptcy is undischarged. You are legally prohibited from managing, forming or promoting a limited company without first obtaining permission from a court.
What if you're the sole director within the company?
If you are the sole director, then the company will be liquidated and the Official Receiver takes over. Or the courts may appoint an insolvency practitioner.
There is the option to appoint another director to your company before declaring yourself bankrupt. This will avoid the company being wound up. However, you cannot be involved in running the company or hold a directorship once you are bankrupt.
If the company already has multiple directors, then you should just resign by using the Form TM01, available from Companies House.
What happens if another director is declared bankrupt?
If there's a director within the company who has declared bankruptcy but does not inform any of the other directors, there are steps you can take to remove them from the position.
If they have less than 50% of the voting rights, they can just be removed via a motion from the other directors. If they have more than 50%, the situation needs to go to the Official Receiver, who can take any relevant legal action.
What about trading as a sole trader while bankrupt?
You can remain self-employed as a sole trader once declared bankrupt, so long as you trade under your own name, or the name you used when declaring the bankruptcy.
Bankruptcy Alternatives
As bankruptcy is the worst-case scenario, you should explore other options before filing.
One commonly used alternative is an Individual Voluntary Arrangement (IVA). This is a formal alternative where borrowers make a binding payment agreement with their creditors. This may involve paying a reduced monthly repayment over a fixed period to satisfy the debt, or it can mean re-negotiating and agreeing on a lower debt settlement figure.
This system offers greater flexibility than bankruptcy, allowing individuals to continue operating their own businesses.
You can also try to negotiate with your creditors yourself. Many creditors will be willing to come to an arrangement for extended payment terms rather than see you go bankrupt and risk not having their money returned. This is a good reason to speak to your creditors as soon as you realise that you are running into financial difficulty.
This post is for guidance only. All information is correct at the time of publishing and may be subject to change. We recommend that you seek legal advice before taking any action.
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