What happens to company debts and could you become liable?

If your company can’t settle its debts, liquidation is an option. To liquidate your limited company, you need to appoint a licensed Insolvency Practitioner as the liquidator. 

They sell the company’s assets and use the money to repay your creditors, the parties you owe money to, as much as they can.

It’s unlikely that all your creditors will get 100% of what they’re owed. Since the company is insolvent and can’t pay its debts, some debts will remain. 

After distributing the money from asset sales, the remaining debts will be written off, and the company will be dissolved.


Exploring the type of debts written off during a company liquidation?

When a company goes into voluntary or compulsory liquidation, various factors decide how much money a creditor might receive and if any debts get written off:

1. The liquidator’s fee 

The major factor to think about is the cost of the liquidation process itself. You need to pay the liquidator a fee for their services. This covers advising the directors, resolving legal matters, collecting payments owed to the company, examining the directors’ conduct, valuing and selling assets, and distributing funds to the creditors. 

The liquidator’s fee comes from the sale of the company’s assets. Therefore, the higher the fee, the less money will be left for the creditors.

2. Your company’s asset value 

The value of company assets is crucial. It depends on how much they’re worth and how easily they can be sold. 

If the company has valuable and easily sellable assets, the liquidator can swiftly turn them into cash to repay the creditors. This means there’ll be more money available to repay the creditors, and they’ll get a larger proportion of what they’re owed.

3. Ranking for repayment 

The repayment hierarchy is crucial in liquidation. When a company goes into liquidation, there’s a specific order in which creditors get paid. 

There are three main classes: secured, preferential, and unsecured creditors. Each class must be paid in full before the liquidator can proceed to the next one.

Unsecured creditors are at the bottom of the payment hierarchy. By the time they’re paid, there’s often very little left. They usually receive only a portion of what they’re owed, and any remaining debts are typically written off.


How do creditors get repaid when a company is in liquidation?

In liquidation, unsecured creditors are the last to receive payment, and it’s often their debts that get written off. Unsecured business debts include payments owed to trade suppliers, rental fees, utility bills, unpaid corporation tax, business rates, and unsecured bank debts like overdrafts and Bounce Back Loans.


Should I have to repay company debts on my own?

Generally, no. Any debts that the liquidator can’t repay from the funds generated by selling company assets are written off. As a company director, you benefit from limited liability. This means you’re not personally responsible for debts the company can’t settle.

However, there are situations where personal liability issues may arise. During the liquidation process, the Insolvency Practitioner must examine your actions leading up to the company’s insolvency. You might become personally responsible for some or all of the company’s debts if they find evidence of any of the following:

1. Undervalued transactions: If you sold company assets for less than their market value before liquidation, it reduced the funds available for creditors.

2. Preferential payments: If you prioritised paying certain debts over others or showed favouritism to connected creditors like business partners and family members, it could lead to personal liability.

3. Unlawful dividend payments: If you distribute dividends to shareholders without adequate retained profits, it could result in personal liability.

4. Fraud and misrepresentation: Engaging in transactions knowing you couldn’t fulfil them or withholding important information during finance negotiations could lead to personal liability.

5. Inaccurate record-keeping: Failing to maintain a clear separation between personal and company finances could also result in personal liability.

6. Trading while insolvent: Continuing to trade when aware or should have been aware of the company’s insolvency, thereby worsening creditors’ positions, may lead to personal liability.

Even if you haven’t committed any wrongdoing, you might encounter personal liability issues if you’ve signed a personal guarantee for company loans or have an outstanding director’s loan. 

In such cases, the liquidator or the lender, if you’ve signed a personal guarantee, can pursue legal action against you to reclaim funds personally.


How does my company go into liquidation?

If your business is facing difficulties, liquidation isn’t the only option. An Insolvency Practitioner can assist in exploring alternatives such as a Company Voluntary Arrangement (CVA) to repay creditors gradually. However, if the company isn’t financially sustainable, liquidation might be the best course of action for all involved.

There are two paths to liquidation: Creditors’ Voluntary Liquidation (CVL) and Compulsory Liquidation. In a CVL, you voluntarily initiate the process and put the company into liquidation. 

In Compulsory Liquidation, a disgruntled creditor compels the company to enter liquidation.

The processes in both types of liquidation are similar, and any unpaid debts will be written off. However, in Compulsory Liquidation, the liquidator’s investigation into your conduct is more extensive, potentially raising the risk of personal liability.


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How can Vanguard Insolvency assist you? Get Insights! 

If your company is struggling with significant debts and you’re considering liquidation as a solution, we’re here to help you find the best way forward. 

Contact our experienced team of Insolvency Practitioners for a free, same-day consultation or schedule a no-obligation meeting at one of our 100+ offices across the UK.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.