Does Liquidation Write off Company Debt?

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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30th April 2024

Liquidation is often viewed as a definitive end for a company, but what does this mean for the debts a company might have accumulated?

What Happens to Debts When a Company is Liquidated?

When a company goes into liquidation, its assets are sold to repay creditors, with all remaining debts written off.

The process begins with the appointed liquidator selling the company’s assets to generate funds. These funds are first used to repay secured creditors, whose loans are backed by specific assets. Following this, preferential creditors, such as employees owed wages, are paid.

Any funds left are then distributed to unsecured creditors, like suppliers.

Here is the list in order of payment priority during a liquidation of a UK limited company:

1. Secured creditors (banks, lenders with secured loans)
2. Preferential creditors
   1. Employee claims for unpaid wages, holiday pay, etc. (up to a statutory limit)
   2. Certain pension contributions
3. Secondary preferential creditors
   1. Certain tax debts (VAT, PAYE, NI contributions)
4. Prescribed part (set aside for unsecured creditors from remaining assets)
5. Holders of floating charges
6. Unsecured creditors
   1. Trade creditors (suppliers, service providers, contractors)
   2. HMRC debts for non-preferential taxes
   3. Employee claims above statutory limit
7. Company directors’ loans (unsecured)
8. Shareholders’ loans

If the proceeds from the sale of assets do not cover all debts, any outstanding debts are written off at the end of the liquidation process. This means that these debts are cancelled, and creditors cannot seek further repayment.

Are There Debts Which are Not Written off During a Company Liquidation?

Yes, there are certain types of debts that may not be written off during a company liquidation in the UK:

1. Personal Guarantees: If company directors have provided personal guarantees to secure loans or debts owed by the company, those personal guarantees will survive the liquidation process. Directors will remain personally liable for the outstanding amounts covered by their personal guarantees, even after the company itself has been liquidated.
2. Overdrawn Directors’ Loan Accounts: Directors’ loan accounts that are overdrawn (the company owes the director money) at the start of liquidation are treated as company assets. The liquidator has a duty to pursue repayment of these overdrawn amounts from the directors personally, as the money technically belongs to the company.
3. Wrongful or Fraudulent Trading: If the liquidator determines that the company’s directors have engaged in wrongful or fraudulent trading, leading to the company’s insolvency, the directors may be held personally liable for some or all of the company’s debts. This liability would not be written off in the liquidation process.
4. Fines and Penalties: Fines, penalties, and other debts arising from criminal or regulatory breaches committed by the company or its directors may not be written off during liquidation, as they are considered personal liabilities rather than company debts.

FAQs on Company Liquidation and Debt Write-Off