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Company debts

If you are a director of a company, its debts are strictly speaking not your debts unless they are made up of certain taxation debts or ones you guaranteed.  The following gives an overview of what happens to companies that are insolvent.

Liquidation

Liquidation is the process of bringing a company’s business to an end and distributing its assets to claimants. In most cases, liquidation occurs when a company is insolvent, meaning it cannot pay its debts when they are due.

Liquidation is generally initiated by the directors or through the courts by a creditor.  In either case, a liquidator takes control of the company.  The liquidator might also have been the voluntary administrator of the company (see below).

The liquidator will sell the assets of the company that are not subject to security.  Secured creditors will seize the assets that are subject to their security.

The funds from the assets sold by the liquidator will be used to pay unsecured creditors after the liquidation costs are paid.  If there is a surplus (which is rare), it will be given to the shareholders.

Liquidators might also decide to investigate the affairs to the company with a view to recovering money and assets as a result of transactions that are seen to be “unfair” or dishonest.  This could involve legal action through the courts.

Voluntary Administration

The directors of a company have the option of putting it into voluntary administration if there is a prospect of saving the business or even the company itself.

Voluntary administration is a complex process whereby a voluntary administrator is appointed to take control of the company.

Companies are generally under voluntary administration for a limited period of time, pending a proposal being put forward to save the business or the company.  Creditors will vote on any such proposal.  If creditors vote against or if there is no proposal, the company will likely go into liquidation.

Receivership

This is a process whereby a secured creditor takes control of an asset of the company that subject to its security when the company is in default of payment.

Mortgagee-in-possession

This is also a process whereby a secured creditor takes control of an asset of the company that subject to its security when the company is in default of payment.

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