01: Introduction

If you are in business, it is worth having a basic understanding of bankruptcy law, if only to know what the position is if an associate, customer, supplier or acquaintance encounters financial difficulties.

Causes of bankruptcy

The most common circumstances in which a bankruptcy or insolvency arises are overtrading, taking on too much debt, bad debts, declining assets, and not providing for liabilities such as tax.

Individuals who are unable to pay their debts may face the possibility of bankruptcy, under which virtually all their assets are taken and shared among their creditors.

• When the bankruptcy ends, the debtor is largely freed from outstanding claims and may make a fresh start.
• As an alternative to bankruptcy, a debtor may succeed in making a ‘voluntary arrangement’ (see below) with creditors.

If partners or sole traders cannot pay their debts as they fall due, they may be made bankrupt if what they owe exceeds what they own. This may even happen if they cannot pay their debts from available ‘liquid’ assets, if the value of their total assets exceeds the value of what they owe.