Liquidation is a formal legal process with a clear purpose: to deal with a company’s assets, liabilities, and outstanding debts in an orderly way before closing the company down. What then happens to the debts depends heavily on the type of liquidation involved, and there are two main forms of voluntary liquidation: Members’ Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL). While both processes end with the company being closed down, the treatment of debt is completely different in each case.
Does Liquidation Wipe Debt Away?
A limited company is its own legal entity, which means its debts typically belong to the company rather than the directors personally. In the majority of cases, once the liquidation process is complete, any unpaid company debt is written off alongside the dissolved business.
There are important exceptions, and cases where directors have signed personal guarantees, acted improperly, or continued trading when the company was clearly insolvent will often cause company debts to transfer to directors after the company is dissolved.
What Happens To Debt In An MVL?
What happens to debt when a company goes into liquidation using MVL? An MVL is only available to solvent companies, which means that the business must be able to pay all of its debts in full within 12 months. Directors are required to make a formal, legally-binding declaration confirming this is the case before the process begins. As a result, MVL is not a solution for dealing with unaffordable debt.
It’s more commonly used when:
- Directors are retiring.
- A company is no longer needed.
- Shareholders want to extract retained profits tax-efficiently.
Because the company is solvent, creditors are expected to be paid in full before any remaining funds are distributed to shareholders. Existing debts after the 12-month repayment period are settled as part of the winding-up process.
What Happens To Debt In A CVL?
A CVL is how to liquidate a company with debt in the majority of cases. When a company cannot pay its debts as they fall due and there’s no realistic route to recovery, this is the typical route directors will go down. Directors are expected to act in creditors’ best interests rather than continuing to trade and making the situation worse. Once the company enters liquidation, trading stops immediately, and a licensed insolvency practitioner is appointed as liquidator.
All company assets are sold, and the proceeds are distributed to creditors in a legal order of priority.
Typically, the order is:
- Secured creditors.
- Costs of the liquidation.
- Employee claims.
- HMRC tax claims (see our blog on company liquidation and tax debt).
- Unsecured creditors.
- Shareholders.
More often than not, there is not enough money available to repay everyone in full in a CVL. Unsecured creditors often only receive a partial repayment, or potentially nothing at all. Any remaining unpaid debt is normally written off when the company is dissolved.
If you require more information on what happens to debt when a company goes into liquidation, or require advice from a business rescue professional, then our highly experienced team is available to help. We specialise in helping our clients with business rescue and closure strategies in a clearly communicated manner that helps them achieve the best results possible. You can get in touch with us for assistance today.
