Understanding company debts during and after liquidation
If you are a company director in Scotland and are struggling under the weight of increasing business debts which you simply cannot afford to repay, liquidation may be an appropriate course of action.
Placing an insolvent company into liquidation – once you know the chances of being able to turn around its fortunes are slim – is a way of dealing with its outstanding debts and ensuring creditors do not suffer any further financial losses.
But what actually happens to company debts during and after the liquidation process?
What happens to debts during liquidation in Scotland?
Liquidation is a formal process which is used to bring about the closure of a company which is no longer needed or wanted. While solvent companies can be liquidated, this is often a process used by insolvent businesses as a way of dealing with its outstanding debts. This is done through a process known as a Creditors’ Voluntary Liquidation – or CVL for short.
As part of the liquidation process, all assets belonging to the company will be identified by the appointed insolvency practitioner before being sold for the benefit of creditors. Creditors will be repaid as far as possible using these proceeds according to a set hierarchy as set out in the Insolvency Act 1986.
Unfortunately, the nature of being insolvent means that there will not be sufficient asset realisations to repay all creditors in full and some debt will therefore remain outstanding following the liquidation of the company.
What happens to debts after liquidation in Scotland?
When it comes to the issue of company debts following liquidation, is important to understand that a limited company is classed as a separate legal entity from that of its individual directors and/or shareholders.
Therefore, any debts which remain unpayable following the completion of the liquidation process will, in effect, be written off. Directors will not be expected to cover the shortfall or contribute towards those creditors who remain unpaid.
There is a major exception to this rule, however, which should be considered before you place your insolvent company into liquidation. This exception is related to personal guarantees.
Understanding personal guarantees and liquidation in Scotland
A personal guarantee may be asked for when a limited company – particularly one which is newly established or one with a poor credit rating – is looking to access funding from a bank or other lender.
As a limited company is ultimately liable for its own debts, a company entering liquidation after taking out a loan is seen as a huge risk by lenders. In order to mitigate this risk, the bank may ask the company’s director to sign a personal guarantee to underpin the borrowing.
Once a personal guarantee is given, this makes the individual who signed the guarantee personally responsible for repaying the outstanding balance on the loan should the company be unable to do so – such as in the event of liquidation.
How Scotland Liquidators can help with liquidation and limited company debt
If you are considering liquidating your limited company as a way to deal with unmanageable debts, the experts at Scotland Liquidators are here to help.
Our team of licensed insolvency practitioners can talk you through your options when it comes to limited company debt and suggest the best course of action for your circumstances.
If liquidation is deemed to be the most appropriate solution, we will be with you every step of the way from your initial call, right through to the ultimate closure of your company. Contact the experts at Scotland Liquidators today.
