We are often asked by worried directors What happens if my limited company goes bust?
The term “goes bust” is just a catch all phrase which can cover a number of company insolvency scenarios, from formal company insolvency processes to business recovery, business turnaround, company restructuring or business restructuring.
The four types of formal company insolvency processes
There are four principal insolvency procedures designed for companies which could answer the question of what happens if my limited company goes bust. These are:
- Administration – This is a procedure designed to give a company breathing space with a view to either a business recovery or business turnaround, or to allow for a business restructuring or company restructuring. A business rescue expert will be appointed as administrator in any company administration.
- Liquidation (or winding up) – This is a dissolution procedure for companies where the life of a company is brought to an end. There is no business recovery or company rescue element to liquidation. With liquidation, a business rescue expert is appointed as an independent liquidator to collect in and distribute assets to creditors.
- Receivership – This is where a receiver is appointed by a creditor to protect their interest in assets in a company. It is possible the company will be in a business recovery situation or company restructuring/ business turnaround or be experiencing cash flow problems for the creditor to consider the assets to be at risk. Again, an independent business rescue expert is appointed as Receiver over the assets. Receivership does not necessarily mean that the company has gone bust. The company may continue but it very much depends on the circumstances.
- A company voluntary arrangement – This is a contractual voluntary arrangement between creditors and a company to try to avoid a company going bust and allow for breathing space for a company rescue and business turnaround. If the company voluntary arrangement succeeds then this does not mean that a company has gone bust but will usually bring about a business turnaround and business recovery.
Are directors liable for debt in a limited company?
What happens if my limited company goes bust from the director’s point of view is that the starting point is that a director’s liability is limited to their shares in the company. When a company is on the brink of insolvency however their duties change from shareholders to creditors. If a company goes into liquidation, then a liquidator may review the actions of the director prior to liquidation to assess whether the actions of the director increased amounts outstanding to creditors and if that is the case, there may be personal liability for a director.
If you are concerned as a company director about your personal liability or want more information on what happens if my limited company goes bust, contact our team of business rescue experts at Francis Wilks & Jones. We have a wide range of experience in company rescue and can advise you on protecting your position and that of your company.