Last Updated: Mar 18, 2021

Bankruptcy and Your Business – Can I Run a Business While Bankrupt?

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Declaring yourself bankruptcy is never a decision to be taken lightly, but when you are running a business that involves employees, suppliers and shareholders, taking this step can also have a huge effect on other people and therefore makes the decision even more complicated. Personal insolvency cases hit high levels after the recession and many people still have ongoing debt problems that they struggle with – so a lot of business owners have wondered if they can still run a business while being bankrupt?

Basics of going bankrupt

There are two routes to going bankrupt – either you can declare it yourself because you can no longer keep up with paying your debts or cannot afford to pay someone back that you own money to, or a creditor can apply to make you bankrupt. In the second situation, you have no real say over the matter but you must owe the creditor at least £5,000 before they can take any action. However, bankruptcy isn’t the only option available to you and choosing to go bankrupt does have serious consequences.

Reasons to consider going bankrupt include:

  • Relieves pressure because creditors are no longer contacting you about the debt
  • You get to keep some things such as household goods and a living allowance
  • Threats of court action will stop
  • Money you owe will be written off

However, there are also a number of disadvantages to going bankrupt that you should also consider:

  • Depending on your income, you could be made to pay towards the debts for three years
  • Getting credit is very difficult when you are bankrupt
  • Your credit rating is affected for 6 years
  • You may have to sell your home to clear off your debts
  • Some of your possessions may be sold for the same reason including a car and luxury items
  • Some jobs won’t employ people who are bankrupt
  • Your bankruptcy will be published to the public, although you can ask for this to not contain some details if you are afraid of personal repercussions

Bankruptcy and owning a business

One of the first things you should realise is that if you declare yourself bankrupt, you cannot be a company director of your own company or any others while the bankruptcy is undischarged. You are legally prohibited from managing, forming or promoting any limited company without first obtaining permission from a court.

What about if you are already a company director for your company?

Then the situation depends on your individual circumstances and also the nature of the company. For example, if you are the sole director, then you company will be wound up and the Official Receiver will take over responsibility for liquidating the company and selling the assets. Or the courts may appoint someone to do this, usually an insolvency practitioner.

There is the option to appoint another director to your company before you declare yourself bankrupt and therefore avoid the company being wound up. But once you are declared bankrupt, you can no longer be a company director yourself.

If the company already has multiple directors in place, then you should resign your position. There is a special form for terminating a director available through Companies House called Form TM01.

Should another director within the company declare bankruptcy and doesn’t inform you or other directors, then there are steps you can take to remove them from the position if they won’t resign. If they have less than 50% voting rights, they can simply be removed by a motion passed by the other directors. If they own more than 50%, then the situation needs to go to an Official Receiver for them to take any relevant legal action to sort out the problem.

You can remain self-employed as a sole trader once you are declared bankrupt with a few conditions. The main one is that you must trade under your own name or the name you used when you went bankrupt.

Bankruptcy alternatives

When you own your own business or are a company director for a business, it always pays to look for alternatives to bankruptcy whenever possible. One commonly used option is an Individual Voluntary Arrangement or IVA. This is a formal alternative to bankruptcy where borrowers make a binding payment agreement with their creditors.  This may involve paying reduced payments over a period of time to satisfy the debt, or negotiating and agreeing on a lower debt settlement figure. The system has greater flexibility than bankruptcy and allows the person to continue running their own company.

You can also try negotiating with creditors by yourself. Many will be more interested in coming to an arrangement for extended payment terms than see you go bankrupt and risk not seeing a return of their money. So as soon as you realise you are facing financial problems, speak to creditors and see what arrangements can be made before your relationships become too strained.

The Citizens Advice Bureau also offer free support if you are considering bankruptcy or are in financial difficulties. There are also a number of charities who can help too including StepChange.