What happens when a company goes bust?

I have just recently been interviewed for the radio. As someone who has never been interviewed for a radio show it was, I have to admit, an uncomfortable experience. Fortunately though, it went fine. The subject in hand was of current interest locally and is definitely worth putting down in black and white (with which I am far more comfortable), as follows.

I was asked what happens when a limited company goes bust what happens to it, and what happens to its directors and, more specifically, what is there to stop the company’s officers setting up again in the same or a very similar business.

When a company goes bust the directors have a duty to both it and its creditors to deal with it appropriately. This will normally involve an insolvency procedure; either voluntary liquidation, administration or a company voluntary arrangement. A company voluntary arrangement will generally not involve a company ceasing to trade, whereas an administration is likely to and liquidation certainly would. In all events it is better to jump than to be pushed. If the directors of an insolvent company do nothing, it is likely that a creditor will petition for it to be compulsorily wound up by the Official Receiver. Any control the company’s officers had over the process will be lost.

With regard to the directors and other officers of the company, because of its limited liability status, they are not affected by its insolvency and, unless they have signed a personal guarantee to the bank or similar, there will be no financial impact on them personally.

The discussion then moved on to whether there is anything to stop a director of a company that has gone bust setting up and starting again. The short answer is no, there is nothing to stop anyone who through their honest efforts has been unfortunate enough to run a company that has run into financial trouble and become insolvent.

However, there are circumstances where if a director is found to have acted inappropriately in their duties, normally by some sort of deliberate dishonesty, then it is possible that action will be taken under the Company Directors Disqualification Act, which could result in them being disqualified from acting as a director for a period of time. In a voluntary liquidation or administration the appointed insolvency practitioner undertakes the investigation and provides a report to the Department of Innovation and Skills, who will then decide whether any further action is required. In a compulsory liquidation the investigation is carried out by the Official Receiver.

As ever, the key is for a company’s officers to remain fully aware of its financial situation and if it looks like there is any sign of difficulties, to take appropriate advice early.