Bankruptcy whether personal or corporate is a way of wiping the slate clean; it is a fresh new start without the worry and stress of debt. There are distinct similarities between the two, both personal and corporate insolvency, but there are also very apparent differences. Individuals file for bankruptcy, whereas companies go into liquidation. Once a personal bankruptcy order has been issued then the individual is usually discharged from the bankruptcy after 12 months, but a company will cease to exist completely after going into liquidation.
If an individual is in debt and they are unable to repay their debts they can then file a petition for their own bankruptcy. Creditors similarly can file a petition against an individual for bankruptcy, the individual would need to owe the creditor in excess of £750 in order for them to be able to do this. Likewise a creditor can force a business into compulsory liquidation for the same reason, they are owed over £750. In both instances usually the creditor will send a statutory demand for monies owed, if this remains unpaid within 21 days then the creditor has the right to apply to the court to make the individual bankrupt or to wind the company up.
The charge for filing your own petition for personal bankruptcy is £700, this consists of £525 for administration costs and £175 towards the court costs. If a creditor petitions to have an individual made bankrupt it will cost more. They fees for this will be £920, £700 for administration and £220 court costs.
If a company goes into voluntary liquidation the costs for this will depend on the charges of the particular insolvency practitioner they choose. If a creditor applies for the ‘winding up’ of a company they will have to pay £1,165 petition deposit and £220 court fees, £1,385 in total.
The bankruptcy petitions or winding up petitions are filed at the local county court, and dealt with by the Official Receiver or liquidator thereafter.
For individuals the Official Receiver will deal with their bankruptcy. Any assets the individual has will be sold and any monies raised from this will be used to cover costs and to repay their creditors as much as possible. After 12 months the individual is discharged from the bankruptcy and all remaining unpaid debt is then written off. In effect the individual then has a completely clean slate.
Businesses can take a different route. If a company find they are unable to pay their creditors, or HMRC, then they can in the first instance enter into administration. This is the preferable solution as the business can keep trading and possibly avoid insolvency. Assets that the company has can be sold off by the administrator to enable the company to pay its outstanding debts and thereafter continue trading. However administration can sometimes not resolve the situation, and this can then still lead to the inevitable liquidation.
A company may choose to go in to voluntary liquidation, where they wind their business up and cease trading. This is preferable to compulsory liquidation as it is far less stressful, the company directors are advised throughout and as long it is the correct and only viable decision the directors are less likely to be held personally responsible. It is also advisable for a company to do this on realisation that they cannot continue to trade without accumulating further losses – as if they do not they may be held accountable for this if they are then forced into compulsory liquidation.
The party that petitions for compulsory bankruptcy does not have to be a creditor, it could be a shareholder trying to recover their investment, the Secretary of State or the Official Receiver. In the first instance they will lodge a winding up petition with the court to try to recover the debt owed to them. The court can dismiss this if they find the petition is groundless. If they do not then the liquidation process will begin. A liquidator (the Official Receiver or an Insolvency Practitioner) will be appointed and they will sell off the company’s property and any other assets the company owns. They will cancel all existing contracts and collect in any money that is owed to the company. The resulting monies will be used to pay off as many creditors as possible. Depending on the size of the company this process can take anything from a few weeks to many years to complete.
Company directors are rarely penalised when a company goes into liquidation, unless they have acted inappropriately and there is evidence of misconduct. If there is any evidence of wrongful trading or fraudulent activity this can then lead to personal liability.
When a company enters into liquidation whether voluntary or compulsory the end result will always be the same, afterwards the company will no longer trade and will completely cease to exist.
In conclusion personal and corporate bankruptcy have their differences, but for those involved in both processes it can be a very difficult and distressing time. Despite this ultimately most find afterwards that it is a release, they are freed from both the debt and the worry. In many cases individuals then go on to prosper, and those who have ran liquidated companies learn from their mistakes and can then go on to run extremely successful companies!