Bankruptcy

What it means

Bankruptcy is court proceedings in which the assets of an over-indebted or insolvent debtor are realised and the proceeds distributed among creditors in the statutory order. A company does not enter it voluntarily - unlike liquidation.

Insolvency takes two forms: inability to pay, where the debtor cannot meet several payables to several creditors past their due dates, and over-indebtedness, where liabilities exceed assets.

Bankruptcy is the end of the road, not the only option. Restructuring tries to keep the company alive and agree with creditors how much of the debt it will repay and when, while for natural persons debts are dealt with through personal debt relief. Bankruptcy, by contrast, usually ends the business: the trustee realises the assets and the company is struck off once the proceedings close.

How it works in practice

Once bankruptcy is declared, the power to dispose of assets passes to the trustee and creditors lodge their claims within a statutory deadline that cannot be extended. A late lodgement means the claim goes unsatisfied.

So a creditor watches the Commercial Bulletin and keeps debtors under review in the sub-ledger. A claim caught in bankruptcy is also grounds for an impairment allowance.

Declaring bankruptcy does not stop the bookkeeping. Extraordinary accounts are prepared as at the day before the declaration, and the documents, books and access are handed to the trustee, who then decides how the books are kept from there on. If a client of ours ends up this way, we prepare a handover record so it is clear exactly what the trustee received.

What to watch out for

The managing director must file for bankruptcy within the statutory period once over-indebtedness arises; failing to do so brings liability for damage and personal sanctions. Postponing in the hope that liquidity improves is therefore a decision taken at personal risk.

Bankruptcy can reach back to a creditor too. Payments and security received from the debtor shortly before the declaration, especially where they put that creditor ahead of the others, can be challenged by the bankruptcy trustee as a voidable act, with repayment demanded. A paid invoice is therefore not necessarily settled for good.