Insolvency

Facing corporate or personal insolvency can be a stressful experience. At AHACCOUNTANTS, we provide expert guidance on your options and their implications in the Nottingham area.

Personal Insolvency – Bankruptcy

Bankruptcy is a formal legal process designed for individuals unable to pay their debts. It ensures that an individual’s assets are divided among creditors, providing a fresh start free from overwhelming debts. However, bankruptcy will impact your credit rating for six years after the order is made.

You can declare yourself bankrupt, or creditors may apply to have you declared bankrupt. Once bankruptcy is declared, the Official Receiver or an insolvency practitioner is appointed as the ‘trustee in bankruptcy’ to manage your assets. It is a legal requirement to cooperate with the trustee in disposing of your assets. You can keep necessary work items and everyday household belongings like furniture and clothing, but your bank accounts will be frozen. While you can open a new account post-bankruptcy, you must inform the bank of your status.

If you own a home, it may be sold to repay creditors, although protections exist for partners or children living with you. The trustee can also sell your vehicle unless it’s essential for work or family circumstances.

What if I’m Self-Employed?
If you are self-employed, your business will close, and any business assets will be claimed by the trustee. You may restart trading, but strict requirements must be followed.

Payments Towards Debts
The trustee will liquidate your assets for creditor benefit. If you can afford it, you may be required to make payments towards your debts from your income for up to three years. This contribution is determined based on your income and expenditure.

Ending Bankruptcy
Discharge from bankruptcy typically occurs after 12 months but may be extended if you do not cooperate with your trustee.

Other Options

It is vital to seek professional advice early on to explore the most appropriate course of action. Alternatives to bankruptcy include:

• Individual Voluntary Arrangement (IVA): An agreement to settle all or part of your debts, either through regular payments or a lump sum. This formal agreement, administered by an insolvency practitioner, prevents creditors from taking action against you but can still result in bankruptcy if not complied with.
• Debt Management Plan: An arrangement through a debt management company that collects contributions from you and distributes them among your creditors, applicable only for unsecured borrowings.
• Debt Relief Order: Available for individuals with debts under £30,000 and negligible spare income or assets. This route shares similar restrictions to bankruptcy.

Corporate Insolvency

A company is deemed insolvent when it cannot pay its debts as they become due or when liabilities exceed assets. Various legal procedures exist for managing a company’s insolvency, primarily focusing on liquidation. Creditors may take legal action to recover amounts owed, potentially resulting in a court application to wind up the company. Directors may also apply to wind up the company.

In the event of liquidation, the company ceases trading and is struck off from the Companies House register. An insolvency practitioner is appointed as the liquidator, tasked with realizing the company’s assets, resolving outstanding legal matters, and distributing available funds to creditors.

Corporate Insolvency and Governance Act 2020
In response to the impact of COVID-19, this Act introduced temporary measures and permanent changes to insolvency procedures, including a company moratorium. The moratorium allows companies to retain control and consider restructuring options for a statutory breathing space of 20 days, extendable to 40 days with court approval. The introduction of this moratorium marks a significant shift in UK insolvency law, aligning it more closely with the rescue culture seen in the US.

Responsibilities as a Director

The liquidator is responsible for investigating the reasons behind the company’s insolvency and will request the company’s records and other information. Directors have ongoing obligations to cooperate with the liquidator, but their responsibilities as directors cease upon the liquidator’s appointment.

Consequences Post-Liquidation
The liquidator may investigate whether the insolvency resulted from unfit conduct by the directors, which could lead to a disqualification order preventing you from acting as a director for up to 15 years in serious cases.

Personal Liability for Company Debts
UK insolvency legislation includes provisions for ‘wrongful trading,’ which may hold directors personally liable for certain company debts if they allowed the company to continue trading despite knowing it was insolvent and did not take steps to minimize creditor losses.

Other Options for Companies

Seeking professional advice early is crucial for determining the best course of action. Options include:

• Company Voluntary Arrangement (CVA): A binding agreement overseen by an insolvency practitioner for paying all or part of the company’s debts over time, requiring agreement from at least 75% of creditors. This option allows the company to continue trading during and after the CVA, although non-compliance could result in liquidation.
• Administration: This process involves transferring control of the company to an insolvency practitioner (the Administrator) to explore potential routes for making the company profitable again or realizing more funds than through liquidation. It prevents creditors from taking legal action during this period.