lonely businessman looking out of door with umbrella, concept for facing bankruptcy

In this article, Andrew Knox, head of our insolvency team, answers ten of the most common insolvency and bankruptcy questions we receive.

Financial distress (whether personal or corporate) is a daunting and emotional time.  The internet reveals a host of services and articles on the topic but how do you sift through to find the right answers and information you need and can trust?  Our insolvency partner Andrew Knox can help. Here are ten of the most common questions he is asked.

Top 10 insolvency and bankruptcy questions, answered:

#1 – “My company has debts and a creditor is claiming that I have to pay him back personally because I am a director. Do I?”

No.  A limited company is a separate legal entity from its directors and shareholders.  If the company has made the contract with the creditor, it alone is liable for the debt, unless you have signed a written statement to the creditor that you will pay if the company does not.

#2 – “Will bankruptcy write off all my debts?”

No.  Creditors who are owed money on the date of the bankruptcy order (or debts conditional on the happening of an event or due for payment in the future) cannot pursue you after discharge for repayment.  However, this does not apply to debts incurred after the date of your bankruptcy or certain statutory liabilities like criminal fines or penalties, maintenance and child support payments, fraud liabilities or creditors with security over your property.

#3 – “If I am bankrupt do I still have to pay my mortgage?”

 Yes.  If you do not keep up your mortgage payments your home is just as much at risk of repossession by the mortgage provider.

#4 – “Does bankruptcy mean I will lose all of my possessions?”

No.  Tools, vehicles or other equipment necessary to you in any trade, employment or vocation are immune, as are provisions for meeting the basic domestic needs of you and your family like clothing, bedding and furniture.  However, if an item is of ‘excess value’, (e.g. a Ferrari) it can be seized by the trustee in bankruptcy, sold, and you provided with money to buy a reasonable replacement (an average mileage Ford Fiesta perhaps).

#5 – “Does being a director of a company in insolvency automatically stop me from being a director of any other company?”

No.  Failure itself is not the trigger.  However, it might lead to investigation and could lead to disqualification.  A disqualification order or undertaking would prevent you from being involved in the promotion, formation or management of a limited company, limited liability partnership, limited partnership or general partnership.  A bankruptcy order will prevent you from being a company director until you are discharged.

#6 – “Can I ‘pre-pack’ administration my company and buy it back cheap without its debts or the creditors having to know?”

No.  Administrators operate under strict rules and stringent supervision by the Courts. Creditors have to be given detailed information including (but not limited to) who purchased, how, timing, why the business was not advertised (if applicable) and the terms of payment.  Even then, the deal may be challenged by disgruntled creditors.

#7 – “Can I pay back money owed to me by my company before other creditors or deal with the bank account so that my guarantee liability on the overdraft is mitigated?”

 No.  The watchword of insolvency is equal distribution of assets.  Certain payments to secured creditors or employees have a higher priority to other claims – payments for VAT and tax no longer do.   However, payments ‘just because’ it is a family member or your own money may be overturned later as unlawful preferences and the money have to be paid back to be shared out equally among creditors.

#8 – “Once I am discharged from bankruptcy is it true my trustee in bankruptcy cannot sue me and I am released from any obligations to them?”

 No.  Your duties to your trustee in bankruptcy will continue until completion of the administration of your bankruptcy estate and release of the trustee in bankruptcy.  This may be some time after discharge.

#9 – “Is it true there is nothing to stop me setting up another company with a similar name to the old insolvent company?”

 No.  If the new company has a similar name (or uses a similar get up or branding to the old insolvent company) and certain steps are not taken to comply with the law, this could result in criminal prosecution punishable by imprisonment and/or a fine together.  This is in addition to personal liability for the new company’s debts incurred during the period in which the similar name is being used.  This is not just the name used at Companies House but any name by which the company was known.

#10 – “Will I go to prison?”

Unlikely.  Debtors’ prison was abolished in the 1860’s. However there are some criminal offences linked to conduct in personal and corporate insolvency which can be punished by prison sentences in addition to fines.

If you have a question, please get in touch with our restructuring and insolvency team.