What happens to business debts when my company can’t pay?
If your business has unmanageable debts it cannot pay, there are several avenues you can explore to write off company debt in Scotland. The right solution for you will depend on the company’s financial position, its future viability and whether you want to close the business or rescue it and continue trading.
If you want to rescue the company, a Company Voluntary Arrangement (CVA) could provide the breathing space to continue trading and get your finances back on track. Company Administration and Pre-Pack Administration are other potential routes to explore. Insolvent liquidation is likely to be the best option if the company is beyond recovery.
The importance of acting quickly
The importance of acting quickly
If your company is suffering from cash flow issues and unmanageable debts, you must act quickly. The sooner you act, the more options you’ll have and the greater your chances of rescuing the business.
Getting help as soon you know the business is insolvent will also reduce the risk of personal liability issues. That’s because the directors of insolvent companies have a legal duty to maximise the interests of their creditors. Seeking expert advice from an Insolvency Practitioner immediately will prevent the company’s debts from escalating and show that you are taking your obligations seriously.
Recovery options to write off company debt
Company Voluntary Arrangement (CVA)
If your company has unmanageable debts but the underlying business model is viable, you may be able to make a Company Voluntary Arrangement (CVA) with your creditors.
A CVA is a formal insolvency process that allows you to keep trading while repaying your creditors over time. It usually lasts three to five years depending on the company’s financial situation and the level of debt. During that time, you make monthly payments that are distributed proportionally among the company’s creditors according to how much they’re owed. If you make all the scheduled payments, any remaining debt will be written off at the end of the CVA’s term.
You can only include unsecured debts in a CVA. That includes things like outstanding payments to trade suppliers, HMRC arrears, unsecured loans and overdrafts. 75% of the creditors (by value of debt) must agree to your repayment proposals. If they do, the CVA becomes legally binding and your creditors cannot add charges or interest to their debt or take legal action against the company. The CVA must be set up and supervised by an Insolvency Practitioner.
Company Administration
Like a CVA, Company Administration is a formal insolvency procedure that aims to rescue and recover a struggling business. Administration is suited to companies under significant pressure from their creditors but have valuable assets that could help them turn the situation around.
When the company enters Administration, a moratorium or freeze is imposed to prevent creditors from taking legal action against it. That gives an Insolvency Practitioner the time to assess the business and put a plan in place to rescue and restructure the company, find a buyer for some or all of its assets, or generate a better return for its creditors than if they liquidated it immediately.
As part of that plan, the company may enter a Company Voluntary Arrangement to repay and write off some of its debts. Another option is a Pre-Pack Administration. In this case, the indebted business’s assets will be bought by a new limited company, often run by the current owners. The money raised is used to repay the creditors of the old business, and any remaining debts are written off. The new company can then trade free from debt.
Closure options to write off company debt
Closure options to write off company debt
There comes a point where a business has so much debt that it’s no longer viable. Running an indebted business can also bring so much stress that you no longer want to carry it on. If you find yourself in either position, it’s in your best interests to close it voluntarily.
Creditors’ Voluntary Liquidation (CVL)
Putting your insolvent company into Creditors’ Voluntary Liquidation enables you to close it and deal with the debts so you can walk away. You must appoint an Insolvency Practitioner to act as the liquidator and wind down the company on your behalf.
They will value and sell its assets and use the proceeds to repay its creditors as far as possible. Any debts they cannot repay in full will be written off, the liquidator will remove the company from the Companies House register and it will cease to exist. As long as you have met your legal duties as a company director, the creditors of the old business will not be able to pursue you personally for any unpaid debts.
Can I be held personally liable to repay the company’s debt?
Can I be held personally liable to repay the company’s debt?
The protection provided by a limited company means that, ordinarily, even if your company fails, you will not be personally liable for its debts. The only money you stand to lose is your original investment in the business and any other personal funds you put in.
However, if you have signed a personal guarantee or have an overdrawn director’s loan account, your personal funds and assets will be at risk. You could also become personally liable for some or all of the company’s debt if the liquidator finds you did not act appropriately in the period leading up to or during the company’s insolvency. That includes making preferential payments to connected creditors, paying illegal dividends, trading the company when it’s insolvent and selling assets for less than their true value.
How can we help?
How can we help?
If your business is struggling financially, there are routes you can take to write off debt and rescue or close the company. However, you must act quickly. At Scotland Liquidators, we will assess your situation and explain your options. We can implement formal insolvency procedures on your behalf and close your company efficiently while protecting your position. Get in touch for a free consultation or arrange a meeting at one of our local offices.
