How does bankruptcy affect a limited company director?

A bankrupt person cannot be a limited company director until the court lifts their financial restrictions and discharges them from their debts. This usually happens 12 months after the date of the bankruptcy order, but it can be longer. 

If you are an undischarged bankrupt, you are also prohibited from being directly or indirectly involved in the formation or management of a company. However, you can apply to the court for permission to act as a director whilst bankrupt.

The information in this post relates to bankruptcy in England and Wales. There are different rules and processes for bankruptcy in Scotland and bankruptcy in Northern Ireland. If you live in either of these countries, you cannot declare yourself bankrupt in England or Wales.  

What is bankruptcy?

Administered by The Insolvency Service, bankruptcy is a type of legal insolvency process that enables individuals to write off unsecured personal debts that they can’t afford to repay in a reasonable amount of time.

When a person is made bankrupt, creditors can’t take any additional legal action against the individual to recover debts. Furthermore, they cannot continue to demand payments, charge interest on outstanding debts, or contact the bankrupt individual.

Bankruptcy has serious implications, so this process should only be used as a last resort. Personal assets, such as your car or home, may be sold. You will also lose any savings and shares, although pensions are usually safe.

Your bankruptcy will remain on your credit file for 6 years. This may affect your ability to keep or find a job, particularly if you work in the financial or legal sector. Bankruptcy can also affect tenancy agreements and make it difficult to take out credit in the future.

Who can be made bankrupt?

Bankruptcy only applies to individuals, including company directors, LLP members, partners in general partnerships, and sole traders.

It does not apply to limited companies or partnerships. Insolvency is the equivalent legal process for companies and partnerships that cannot pay their debts.

How can an individual be made bankrupt?

A bankruptcy order (a formal court order declaring an individual bankrupt) can be made for one of the following three reasons:

1. You can’t pay what you owe and want to declare yourself bankrupt
2. A creditor applies to make you bankrupt because you owe them at least £5,000 
3. An insolvency practitioner makes you bankrupt because you have broken the terms of an individual voluntary arrangement (IVA)

You can declare bankruptcy in England or Wales even if you live outside the UK. However, you must have lived in England or Wales in the last three years or had a business there at some point during that time. 

Bankruptcy restrictions on limited company directors

Bankruptcy has a significant impact on limited company directors. If you are a director when you are made bankrupt, you will most likely be disqualified (i.e. banned from the role).

Under Section 11 of the Company Director’s Disqualification Act (1986):

It is an offence for a person to act as director of a company or directly or indirectly to take part in or be concerned in the promotion, formation or management of a company, without the leave of the court, at a time when […] the person is an undischarged bankrupt in England and Wales or Scotland or Northern Ireland.

This means that until you are discharged from your bankruptcy order, you may not perform the following functions without the court’s permission:

• be appointed as the director of a limited company
• continue acting as the director of a limited company
• have any involvement in the registration, management, or promotion of a limited company
• be a member of a limited liability partnership (LLP)
• have any involvement in the registration, management, or promotion of an LLP’s business or affairs
• run a business under a different name without disclosing this name and your undischarged bankrupt status to those with whom you do business
• be a trustee of a charity or certain pension schemes
• work in various posts in education (e.g. a school governor)
• work in various posts, or enter into certain contracts, in the health industry
• hold various posts in certain public authorities or similar organisations

Furthermore, you cannot borrow (or attempt to borrow) more than £500 without informing the lender that you’re bankrupt, nor can you work as an insolvency practitioner.

All of these bankruptcy restrictions will remain in place until your bankruptcy ends.

If you are the sole director of a company

If you are the sole director of a limited company and you become bankrupt, you must resign as a director. Upon doing so, your company will need to be dissolved. 

Alternatively, if you want to keep your company active during your bankruptcy, you can appoint someone as a director to run it for you. However, you need to do this before you are declared bankrupt—otherwise, the company will be wound up.

Director Appointment and Resignation Service See also: Are company directors liable for its debts? Company Dissolution Service - £89.99

Upon appointing a new director, you can continue working for the company as an employee. However, unless you get permission from the court, you must refrain from having any involvement in the management of the business until you are discharged from the bankruptcy order.

This means that you cannot carry out any directors’ duties or influence the new director’s actions or decisions in any way.

Failure to adhere to these restrictions could result in an extension of your bankruptcy order. You could also face criminal charges. We discuss these potential consequences later in the article.

If the company has other directors

If you become bankrupt and the company has other directors, you must notify them immediately and resign as a director. You cannot be reappointed as a director or have any involvement in running the business until your bankruptcy order has ended. However, you may be an employee of the company in the meantime.

Bankruptcy restrictions on company shareholders

If you are also a shareholder, your company shares will pass to the trustee appointed to manage your bankruptcy. Your trustee will either be an official receiver or an insolvency practitioner.

How long does bankruptcy last?

Bankruptcy and imposed restrictions usually end when you are ‘discharged’ from your bankruptcy order. This is normally one year after being made bankrupt. However, it can be longer if you fail to cooperate with your trustee.

Once you have been discharged, you can be a company director. This means that, where applicable, you are free to:

• be reappointed to the company from which you had to resign 
• be involved in the management and promotion of a company or LLP
• register a new company or LLP

However, if a Bankruptcy Restrictions Order (BRO) is made against you, the restrictions under the order could remain in place for up to 15 years. This could prevent you from acting as a company director during the allotted time.

Consequences of acting as a company director while bankrupt 

Unless you have permission from the court to act as a company director or be involved in a company’s management while bankrupt, you could face serious consequences for breaking the bankruptcy restrictions.

In such situations, you may be:

• guilty of a criminal offence, punishable by up to 2 years in prison and an unlimited fine
• personally liable for any company debts that arise while you’re managing the business
• subject to a Bankruptcy Restriction Order (or an additional one if you already have a BRO against you)

If you ask someone to assist you in breaking the restrictions, they may also be subject to prosecution and liable for certain company debts.

Simply resigning as a director is not enough to prevent such consequences if the undischarged bankrupt continues to influence or actively participate in the company’s management.

How to apply to the court for permission to continue as a director

Under certain circumstances, the court may grant a bankrupt company director permission to continue in their role. 

Under section 17 of the Company Directors Disqualification Act 1986, you can apply to the court for permission to act as a director notwithstanding disqualification. 

Typically, you will need to satisfy the court that you have a reasonable requirement to act in such a capacity, as opposed to simply wanting to be a director.

You must also satisfy the court that, if permission is given, the public will be adequately protected. The court may require safeguards and impose certain conditions or restrictions. Any income you receive from the role may be subject to an income payments order. 

If you are considering making such an application, contact the Insolvency Service at legalservices@insolvency.gov.uk for general information and guidance. 

However, you should also consider obtaining independent professional guidance from a legal advisor. 

Can a bankrupt director operate as a sole trader instead?

Bankrupt individuals, including those who were company directors, can operate as sole traders. However, certain restrictions will be imposed until the bankruptcy order is discharged.

You must trade under your own name or the name under which you traded when declared bankrupt. This name must be clearly shown on all business paperwork.

Additionally, you cannot obtain credit over £500 without informing the creditor that you are an undischarged bankrupt.

Wrapping up 

Bankruptcy can have severe implications for company directors, potentially impacting their ability to continue running their business. However, there may be other solutions available to you.

If you are in this situation or considering making yourself bankrupt, you should seek professional debt advice before making any decisions.

An advisor can explain your options and, if necessary, assist with an application to the court for permission to act as a director while you are bankrupt.