The bankrupt’s guide to starting a new business

A recent European Commission report highlights that 50 per cent of businesses don’t survive the first five years of trading and that bankruptcies account, on average, for 15 per cent of all business closures. 

Following a bankruptcy, many entrepreneurs are discouraged from re-starting. However, businesses set up by former bankrupts grow faster than business set up by first timers. In England and Wales, the pre-pack administration process has proved a popular alternative to liquidation for insolvent companies and provides a second chance for a business to succeed. 

Here’s a guide for those facing or having faced a business failure:

New business

1. Entrepreneurs wishing to start up again may use a limited company to run the new business in order to avoid the personal liability attached to a sole trader. However, a bankrupt is prevented from acting as a company director until discharged of the order. While bankrupt, it is an offence to create, manage or promote a company without prior permission from the court.

2. While there is no restriction preventing an undischarged bankrupt from trading again as a sole trader, it is not possible to carry on a business under a different name to that under which the bankruptcy order is made, unless disclosure of the bankruptcy is made. 

3. Where the business has been rescued by way of a pre-pack administration, the directors must serve notice on the creditors within 28 days should they wish to continue to trade under the original or similar company name.

Creditors

4. A trustee in bankruptcy must administer the bankrupt’s assets with a view to settling creditors’ claims. 

5. Businesses saved by pre-pack administration are usually sold with little marketing. Consequently the administrator is unlikely to have assessed the market and determine the full market value of the business. The knock-on effect of this is that once the business is sold the purchase price may not fully reflect the value of the business leaving less money to distribute amongst the creditors.

6. Debts personally guaranteed by a director of a failed company will remain payable by the individual even if the business is rescued by way of a pre pack arrangement.

Finance

7. A bankrupt will, until discharged, not be able to obtain credit above £500 either alone or jointly with another without first disclosing the bankruptcy. This is likely to cause difficulties in raising the necessary finance to recommence trading as the individual is unlikely to have any other option but obtain credit to start up. Although some lenders are prepared to provide credit, it is likely to come with a higher interest rate attached. A bankruptcy will remain on a bankrupt’s credit report for at least six years after discharge. 

Employees

8. A bankrupt sole trader will generally find that their business is closed and any employees dismissed. 

9. Employees of a business saved by way of a pre-pack will automatically transfer across to the new company under the Transfer of Undertakings (Protection of Employment) regulations.

Changes to pre-packs

10. The government has proposed changes to the rules surrounding pre-pack administrations to combat the perceived abuse of the process at the expense of unsecured creditors, when sales are made to connected parties. The new rules will require that assets be first offered on the open market and notice be given to creditors advising them of the proposed sale, providing creditors with an opportunity to respond. Administrators will also be required to state that (in their opinion) the consideration to be received for the sale will achieve a better result for the creditors as a whole than anything else.

Christopher Wilson is a solicitor at Blandy & Blandy

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