When can I write off company debt?
You cannot just decide to write off company debt. Failing to pay your debts can have serious consequences. If you do not pay what you owe, creditors such as suppliers, landlords, utility providers and HMRC can issue a Winding Up Petition that can lead to the Compulsory Liquidation (forced closure) of your business.
In that instance, a liquidator will investigate the reasons for the company’s failure. If they find that you continued trading the company when it could not pay its debts, you could be made personally liable for those debts or disqualified from acting as a company director for up to 15 years.
If your company cannot pay its debts when they are due, or it has total liabilities that exceed its assets, you should contact a licensed Insolvency Practitioner immediately. They are the only people who can implement formal insolvency procedures. They will assess your circumstances, explain your options and guide you on an appropriate path.
Contacting an Insolvency Practitioner early will also help you:
- Protect yourself as a director
- Maximise your company rescue options
- Reduce the risk of personal liability
How can I write off company debt?
There are four ways to write off company debt. The most suitable approach will depend on the company's financial position, its future viability and your desire to rescue or close the business.
Rescue a company and write off debt
If your company has a valid business model and the potential to return to profitability, there are two procedures you can use to write off some debt without having to close.
- Company Voluntary Arrangement (CVA)
The first option is a Company Voluntary Arrangement, which is a single, structured plan that enables you to pay off a portion of your debts through an affordable monthly payment.
At the start of the process, you will work with an Insolvency Practitioner to propose a formal payment plan to your creditors. If 75% of your creditors (by the value of their debt) agree to your proposals, the CVA becomes active.
The CVA typically lasts three to five years, during which time you can continue trading. At the end of the CVA, any debt you have not repaid via the monthly instalments is effectively written off, allowing you to move forward without the burden of unmanageable debt.
Every arrangement is different, but it’s common for a CVA to write off between 30 and 50% of a company’s unsecured debt.
Company Administration may be a better fit if you run a company that’s under severe financial pressure but still has the potential to be successful. It’s more common among larger or more complex companies, but it’s also suitable for SMEs.
You must appoint an Insolvency Practitioner to act as the administrator. They will take control of the company and create a plan to rescue the business. If that’s not possible, they’ll look to sell it as a going concern or achieve a better outcome for the creditors than liquidation.
In some cases, the Administration concludes with a Company Voluntary Arrangement (CVA), where creditors agree to a structured repayment plan. Creditors may choose to write off some of the debt if they believe the return offered through the CVA is likely to be greater than they would receive through liquidation.
Close a company and write off debt
Of course, it may not always be possible to rescue the company. If it is insolvent and has no realistic prospect of making a recovery, it will be in the best interests of all parties to close it.
- Creditors’ Voluntary Liquidation (CVL)
If your company has debts it cannot pay and the business is no longer viable or profitable, you can close it voluntarily using a Creditors’ Voluntary Liquidation.
In a CVL, you appoint an Insolvency Practitioner to liquidate the company on your behalf. They will value and sell the assets, using the proceeds to repay creditors in order of priority. The liquidator will also investigate the reasons for the company’s failure and the conduct of its directors during the period leading up to its insolvency.
As long as you have acted properly and fulfilled your legal duties, the company will be closed, and any debts it cannot pay will be written off. That enables you to draw a line under the business and move on. You may also be eligible to claim director redundancy pay.
Another way to close a company with unmanageable debts is to wait for your creditors to force it into Compulsory Liquidation. Your creditors can do that by issuing a Winding Up Petition against your business, which they may do if they are unable to collect a debt.
If the petition is successful, the court will make a Winding Up Order, which forces the company into liquidation. A liquidator will be appointed to sell the company’s assets and repay its creditors as far as possible. They will also investigate the conduct of the directors.
Waiting to be forced into liquidation by a creditor can also be very damaging to your professional reputation. It also increases the risk of penalties, including personal liability for company debts and director disqualifications. If there is no evidence of wrongdoing, the debts the company cannot repay will be written off, and you will be free to start a new venture.
Can company debt affect your personal finances?
One of the advantages of running a limited company is the benefit of limited liability. A limited company has a separate legal and financial identity from its owners. That means, if the business fails, the owners are not liable for its debts. Their liability is limited to their original investment in the company.
However, there are a few ways that the company’s debts can affect your personally:
- Personal guarantees - If you have signed a personal guarantee for company borrowing, such as a loan or credit agreement, those debts will not be written off when you close the company. Instead, the lender can call in the guarantee and make you liable.
- Overdrawn director’s loan accounts - If you take more money out of a company than you put in, and it is not a salary or dividend payment, you create an overdrawn director’s loan account. If the company subsequently becomes insolvent and enters liquidation, the liquidator will seek to recover that money for the benefit of the creditors.
- Wrongful or fraudulent trading - If an insolvent company fails and if it is found that you misused company funds or were involved in wrongful or fraudulent trading, you could be made personally liable for some or all of the business’s debts. You could also be disqualified from acting as a director, and even face a custodial sentence in serious cases of fraud.
Need advice?
If your company has debts it is struggling to repay, it is possible to write off some of that debt and continue trading or start again. The first step is to seek advice from a licensed Insolvency Practitioner.
At UK Liquidators, we will assess your circumstances, explain your options and guide you seamlessly through the process from start to finish. Please get in touch for a free consultation or arrange a meeting at one of our 100+ offices throughout the UK.
