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Does liquidation write off company debt?
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What happens to company debts and could you become liable?
If your company cannot pay its debts, liquidation is one of the options available to you. If you choose to liquidate your limited company, you must appoint a licensed Insolvency Practitioner to act as the liquidator. They will sell the company’s assets and use the proceeds to repay your creditors (parties you owe money to) as much as possible.
It’s unlikely that all your creditors will receive 100% of the money they are owed. After all, by definition, the company is insolvent and cannot pay its debts. Any debts that remain after the liquidator has distributed the money from the sale of the assets will be written off and the company will be dissolved.
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When a company enters a voluntary or compulsory liquidation procedure, several factors determine how much money a creditor is likely to receive and whether any debts are written off.
The value of company assets
One major factor is how much the company’s assets are worth and how easy they are to sell. If the company has a significant value of highly marketable assets, the liquidator can quickly turn them into cash to repay the creditors. That means there’ll be more money to repay the creditors and they’ll receive a greater proportion of the amount they are owed.
The liquidator’s fee
Another factor to consider is the cost of the liquidation process itself. You have to pay the liquidator a fee for the work they do. That includes advising the directors, settling legal disputes, collecting payments owed to the company, investigating the conduct of the directors, valuing and selling the assets and distributing the funds to the creditors. The liquidator’s fee is paid from the sale of the company’s assets, so the higher the fee, the less money will be available to the creditors.
The repayment hierarchy
When a company enters liquidation, there’s a defined hierarchy that determines the order the creditors are paid. There are three main classes of creditor - secured, preferential and unsecured - and each class of creditor has to be paid in full before the liquidator can move on to the next class.
Unsecured creditors are at the bottom of the payment hierarchy, so by the time they are paid, there’s often very little left to go around. Unsecured creditors typically receive only a proportion of the money they are owed and any remaining debts are written off.
The unsecured creditors are the last to be paid in liquidation, so it’s usually their debts that are written off. Examples of unsecured business debts include payments due to trade suppliers, rental payments, utility bills, unpaid corporation tax, business rates and unsecured bank debt such as overdrafts and Bounce Back Loans.
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Ordinarily, no. As we’ve said, any debts that the liquidator cannot repay from the funds raised via the sale of company assets are written off. As a company director, you benefit from limited liability, which means you are not personally liable for debts the company cannot pay.
However, there are some circumstances when personal liability issues can occur. When liquidating the company, the Insolvency Practitioner must investigate your conduct in the time leading up to its insolvency. You could become personally liable for some or all of the company’s debts if they find evidence of any the following:
- Preferential payments - You paid some debts ahead of others or have shown a ‘preference’ to connected creditors such as business partners and family members.
- Undervalued transactions - You sold company assets at less than their market value leading up to the liquidation, reducing the money available to the creditors.
- Unlawful dividend payments - You paid dividends to shareholders when the company did not have sufficient retained profits to do so.
- Trading while insolvent - You continued to trade when you knew or should have known the company was insolvent and worsened your creditors’ position as a result.
Inaccurate record keeping - You didn’t keep a clear separation between your personal and the company’s finances.
- Fraud and misrepresentation - You entered into transactions that you knew you couldn’t fulfil or failed to provide the full facts when negotiating finance agreements.
Even if you haven’t done anything wrong, you could face personal liability issues if you have signed a personal guarantee for company borrowing, or have a director’s loan that you have not repaid. In any of these cases, the liquidator (or the lender if you have signed a personal guarantee) can take action against you to recover money from you personally.
If your business is struggling, liquidation may not be your only option. An Insolvency Practitioner can help you explore ways to save your company, for example, by entering into a Company Voluntary Arrangement (CVA) to repay your creditors over time. However, if the company isn’t financially viable, liquidation could be in everyone’s best interests.
There are two routes into liquidation: Creditors’ Voluntary Liquidation (CVL) and Compulsory Liquidation. In a CVL, you initiate the process and put the company into liquidation voluntarily. In a Compulsory Liquidation, the company is forced to enter liquidation by a disgruntled creditor.
The processes in both forms of liquidation are similar and any debts the company cannot pay will be written off. However, the liquidator’s investigation into your conduct as part of a Compulsory Liquidation is more thorough, which could increase the risk of personal liability.
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