Last year there were 3,883 company insolvencies in Q1 alone and that figure doesn’t include those that went into administration or entered voluntary arrangements. In the UK, when a company goes bankrupt, which is called liquidation, it stops trading, is wound up and then taken off the register at Companies House.

Insolvent limited companies go into liquidation. Companies that are sole traders or partnerships, where the owners are individuals, are able to declare they are bankrupt if they become insolvent. Limited companies are protected from personal liability when insolvent by a veil of incorporation. The difference with sole trader or partnership insolvency is that their businesses are not considered separate legal entities.

With enforced bankruptcy, a company’s creditor who is owed more than £750 can apply to the courts and petition for bankruptcy. However, companies can also declare bankruptcy, usually as a last resort, and petition the courts to hand over the process to a licensed IP.

Companies that have declared bankruptcy instruct a licensed insolvency practitioner (IP) to handle the company liquidation process. The IP also deals with paying creditors with the proceeds of the sale of the company’s assets. The Insolvency Act 1986 sets out the liabilities hierarchy that liquidated companies must follow. This hierarchy determines which liabilities are paid first, and in full, before funds are allocated to the next creditor. Read more...