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Can you be a shareholder when bankrupt?

My client was declared bankrupt last year. In the meantime he has a successful sole trade. He wants to incorporate as the business is going well with his partner as director until he is discharged (next year).

What are the pitfalls in this?

Presumably he can still be a shareholder?

It feels a bit wrong however.  Is this common?

Thanks in advance



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31st Oct 2011 14:49

You cannot be a director or shadow director whilst bankrupt. Prima face if he is a majority shareholder he could be deemed a shadow director.Also if he is too successful whilst bankrupt his Trustee make ask for a contribution from his profits for the creditors

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By pawncob
31st Oct 2011 15:03

What business?

How is he running a business if he's bankrupt? Has he applied to the Court?

He can become a Director with the Court's permission. 



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31st Oct 2011 15:19

Although declared bankrupt

you can never be totally free of the debt. So the Trustee can always come back (very unusual). Legally there is nothing stopping you from becoming a shareholder in any company. However the trustee can always have a claim on your assets.

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31st Oct 2011 18:59


Does the above give you the impression that the situation of bankruptcy is a complete farce? I know the honest people can have a rough time but the dishonest people will act like it never exists and nobody will bother them.

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31st Oct 2011 20:55


If a bankrupt is not allowed to earn a living what is the alternative? I agree it can be very easy these days to build up debts of £100k then just go belly up. So what do we do with Greece, Italy etc.

How much have we spent on bailing bankrupt banks out?

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31st Oct 2011 21:12


Can't they get a job like the majority of people?

They have shown themselves to not be very good with money so why allow them to risk other people's money?

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01st Nov 2011 19:32

This was one of the comments I was referring to-

petersaxton wrote:

Can't they get a job like the majority of people?

They have shown themselves to not be very good with money so why allow them to risk other people's money?

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31st Oct 2011 21:37

Limited companies

Likewise with people who start companies, don't file anything, get struck off, start a new one, don't file anything, get struck off ........

Nobody seems to care!

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31st Oct 2011 22:20


What if they genuinely can't get a job and self-employment is the only alternative? Mind you it does seem daft that you can trade self-employed but not be a Director of a Limited Company. Must go back to year dot.

@ShirleyM Take your point, but whatever system is in operation there will be some who will abuse.

Don't forget Northern Rock. How many individuals would get that sort of help? Most people don't go bankrupt unless they have to.

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By Old Greying Accountant
31st Oct 2011 22:33

Late to this one ...

... just recovered the power of speech after reading this bit

"My client was declared bankrupt last year. In the meantime he has a successful sole trade."

You couldn't make it up!

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01st Nov 2011 08:07


I wouldn't mind if the rules were that the bankrupt self employed were strictly supervised. If they had to bring their records in every quarter to ensure that they weren't putting creditors funds at risk then I would consider this acceptable.

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01st Nov 2011 15:31

Great idea Peter

but who is going to pay when there are umpteen bankruptcies.

@OGA No doubt many people thought "what the ...." I would presume credit card debt monthly payments were too high so bankruptcy reduces outgoings, hence a now profitable buiness.

I'm sure the big boys do similar in a round about way.

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01st Nov 2011 15:41


"but who is going to pay when there are umpteen bankruptcies."

what does that mean? are you saying there should be no effective protection and people can do what they want with creditors money no matter what their background is?

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By Old Greying Accountant
01st Nov 2011 15:52

Yes John ...

... I am sure they do too, which is why all the people with a conscience who pay there own way (by reducing self-indulgent expenditure) end up paying 40% on their credit card debt if they miss the deadline by a day!

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01st Nov 2011 15:54


I may be missing the blinking obvious here, so apologies if I've misunderstood things.

Peter, would there actually be any creditors involved?  If the OP's client is trading as a sole trader, which companies with any sort of credit control whatsoever are going to give him a credit line?  There won't be any bank overdrafts (he's probably using a personal basic account since most banks won't even look at discharged bankrupts, let alone people still in bankruptcy, and business accounts are out of the question.)  As such he's probably operating on a cash basis.

I also seem to recall that as a sole trader bankrupt, if he trades under a new name or trading style, he has to inform people of the old trading style.

So there are measures in place to protect other parties should he misbehave.  If he doesn't abide by those measures, then there are obviously consequences for him.

No such measures come into play if he works through a limited company fronted by his partner, however, so it's in everyone's best interests if he continues as a sole trader.

I like your idea about a quarterly review.  Not sure how this would work within an already-overstretched insolvency service.

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01st Nov 2011 16:02

There's plenty of creditors

A sole trader asks for deposits before work done. Many businesses do that nowadays.

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01st Nov 2011 16:06

That is in effect

what is happening: from banks using our money, Greece using EU money etc.etc. I am not saying that there should not be effective protection, but the protection would cost more than the government is prepared to pay so c'est la vie. I do believe that after someone is made bankrupt they cannot have credit unless they inform the creditor that they are a bankrupt. Then it is up to the creditor to decide. You can now get discharged in 6 months. After the last recession many good business went down and many people lost their homes due to financial institutions pulling plugs. So the stigma of bankruptcy is not as great.

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01st Nov 2011 16:12

well well

the idea of going bankrupt surely is to wipe off debts because for what ever reason they cannot be repaid and also to give the debtor a chance to restart - the difference in attitude between say chapter 11 and bankruptcy / iva is still quite pronounced.

once they are discharged they are discharged - i have never seen any comeback thereafter

i cannot see the rationale for checking up on bankrupts most of them only get going again after at least 6 months of being made bankrupt - what is the intention behind this idea guys 

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01st Nov 2011 16:17

Not every bankrupt

I am not saying you should check up on every bankrupt. If a bankrupt set up as a sole trader while still a bankrupt it seems sensible to monitor them.

The idea that bankrupts running their own business shouldn't be monitored because the Insolvency Service doesn't have time is similar to the idea that criminals can carry knives because we don't have enough prisons.

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01st Nov 2011 16:23

lol i thought you would comment Peter!

bankrupts are not criminals in the main your analogy is a little disrespectful to them - one would think that being bankrupt once would be enough for most people -

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01st Nov 2011 16:32

Reading needed

What makes you think that my comments are referring to bankrupts "in the main"?

If you read what I have said you would know that my comments are nothing like what you are referring to.

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01st Nov 2011 16:36

In defense of my client he has no credit now. Everything is paid for up front and he is genuinely trying to make a living now.  He wants the status and tax benefits that being Ltd provide.  Many of his customers are large corporate clients who prefer to deal with Ltd Companies ratehr than one man bands.

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01st Nov 2011 16:47


"Many of his customers are large corporate clients who prefer to deal with Ltd Companies ratehr than one man bands."

Are they that stupid that they don't understand reality?

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01st Nov 2011 17:27

Too many ingrained attitudes on this thread

I dont think we can ever be a truly entrepeneurial culture whilst some of the attitudes to bankruptcy expressed on this thread are allowed to prevail.

I find the idea that someone should not be allowed another chance because they have had a business failure behind them difficult to understand.

You learn from your mistakes, and perhaps the next business will be successful.

By all means protect creditors, but don't stygmatize the bankrupts.

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01st Nov 2011 17:56


What are the views expressed that suggest people should not been allowed another chance?

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01st Nov 2011 18:31


i think your comments may have come out other than you intended ;-)

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01st Nov 2011 19:21

They did?

Can you let me know which comments you are referring to and I'll tell you if I intended something else?

Just to let you know my position:

I know there are many people who get into financial difficulty through the recession or other reasons. If they are employees they can lose their job through no fault of their own. In these circumstances I think the government should encourage lenders to be understanding of the situation.

A lot of businesses go bust through no fault of their own. One of my clients had revenue of £50k per month with city offices and ten staff. After 9/11 their revenue immediately went down to £3k per month and they went into liquidation. Another similar client had revenues of £2.5m per year at the same time and went into liquidation.

Despite this we all know that there are crooks who take advantage of limited company status. I don't see why there are not measures in place to protect the public and honest businesses.

I fail  to see how a person who suggests reasonable measures to protect the public against the small minority of dishonest bankrupts can be accused of calling all bankrupts criminals or stymatising all bankrupts.



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01st Nov 2011 19:45

I'll agree with you there

It does seem like people can disregard bankruptcy laws and carry on as if nothing had happened. I accept that if you own a house and get thrown out it's not very nice but some people live at home with their parents and run up large credit card debts on clothes etc.

Maybe it would be good if there's a scoring system for bankrupts and different rules dependent on responsibility

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