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Bankrupt Business Explained

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What's the difference between buying a business that's in administration compared to one that's in receivership?

Well, quite a lot really. If you're looking to take advantage of others misfortunes as the fault lines rupture through the British economy then understanding the following terms is essentially for a savvy buyer.

Business in administration - Is a company that has been placed in administration either because it's unable to pay their debts or will struggle to in the future. Often confused with receivership, but fundamentally different on one point alone, an administrator is appointed to help the business SURVIVE. 

Administrators are appointed by either, the business owners, a person who has majority stake hold or by a creditor by petition to the court. Usually professional accountants, the administrators work on behalf of the appointee to get the business to a point where it can either be sold on as a going concern or returned to the business owners. When a business is placed under administration, the directors or owners of the business have no control over the day to day running.

If the business is up for sale, the administrators will have tried to get the business into the best possible shape by shedding staff, selling off assets and looking at the processes to make the business more profitable and efficient. When acquiring business through administration it's likely you will be acquiring some of the businesses existing debt.  Therefore, you're likely to be a buying a business that still has some existing operational issues but with some hard elbow grease it has potential to be restored to its former glory.

Receivership - Usually initiated directly by a bank or creditor in which the business has gained a previous secured loan. Specifically designed to look after the creditors interest, a business in receivership is specifically prepared for liquidation by dismantled the business and selling off the companies assets so that the lenders can recover outstanding debts.

Receivership shares similarities with businesses in administration but it is likely that the business has not been prepared for sale as a going concern, rather it has been placed in receivership with the explicit intent of dismantling it to ensure recovery of debt for the creditors. This means that you're unlikely to acquire the business as a whole and will rather acquire assets of it that have market value.

Contrary to popular belief you can not buy a bankrupt business. Bankruptcy has been a misused term by the media to mean a company that is insolvent and therefore in receivership.

Bankruptcy - Is where an individual is relived of their financial obligations i.e. debt by petitioning the court for a bankruptcy order. Under current Uk law bankruptcy applies only to individuals or partnerships not a company, meaning a company is declared insolvent rather than bankrupt. Personal bankruptcy comes in two forms - voluntary or involuntary. By voluntary bankruptcy the individual appeals to the court directly: involuntary bankruptcy occurs when the creditors appeal on the debtors behalf.

There is no guarantee that the court will grant a bankruptcy order, they may deem it more suitable to appoint an insolvency practitioner who will assesses whether debts can be recovered through disclosure of assets. If bankruptcy order is granted, a civil servant (official receiver or trustee) is appointed to investigate your financial affairs and responsible for the disposal of your assets. The bankrupted individual looses all control over financial affairs and future financial options. A bankruptcy order can last between 12 months to 5 years, whereby the individual is then discharged (freed from obligations under the bankruptcy order) and free to continue a new business. It is a last resort and has an adverse effect of securing future credit. 

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