What happens to company debts in liquidation is simple in principle: once the company is dissolved, its unsecured debts are written off because the debtor — the company — no longer exists. But that write-off only applies to the company. Directors can still be personally exposed through personal guarantees, overdrawn director's loan accounts, and, in rarer cases, wrongful or fraudulent trading findings.
This article explains how liquidation actually deals with company debts, the order creditors are paid in, and the specific situations where a debt can still follow a director after the company is gone.
How liquidation deals with company debts
Liquidation is the formal legal process of closing a limited company down and settling its affairs. A licensed insolvency practitioner is appointed as liquidator, sells or realises whatever assets the company has, and distributes the proceeds to creditors in a set legal order.
Once that process is complete, the company is struck off the register at Companies House and ceases to exist as a legal entity. Any company debt that remains unpaid at that point is written off — there is no longer a company left to owe it.
This is the key principle behind what happens to company debts in liquidation: the company's limited liability status means its debts die with it, provided nothing was done improperly along the way.
Which debts are written off when the company closes
In most cases, the following debts are written off once the company is dissolved:
- Unpaid supplier and trade invoices
- Unsecured business loans and credit lines
- Outstanding rent on business premises (subject to any lease terms)
- Unpaid HMRC liabilities such as Corporation Tax, VAT and PAYE, where these are the company's own debt
- Unpaid contracts and commercial claims against the company
These debts belong to the company, not to the director personally, so they are extinguished when the company is dissolved — unless a director has taken on personal responsibility for them, which we cover below.
The order creditors get paid (and who usually loses out)
Liquidation follows a strict payment hierarchy set out in insolvency law. Each level must be paid in full, or as close to full as funds allow, before the next level receives anything:
- Secured creditors with a fixed charge — for example, a lender holding a charge over a specific asset
- Liquidator's fees and expenses of running the liquidation itself
- Preferential creditors — mainly employee claims for wages, holiday pay and pension contributions, and HMRC for certain taxes
- Secured creditors with a floating charge — for example, a charge over general business assets like stock
- Unsecured creditors — most trade suppliers, contractors and unsecured lenders
- Shareholders — only if anything remains, which is rare in an insolvent liquidation
In practice, unsecured creditors are the group most likely to lose out. Once secured and preferential claims are settled, there is often little or nothing left, and unsecured creditors may receive only a small percentage of what they are owed, or nothing at all.
Debts that can still follow a director personally
Limited liability protects a director's personal assets from most company debts, but it is not absolute. A director can become personally liable for company debts in a small number of specific situations:
- They gave a personal guarantee for a loan, lease or supplier account
- They have an overdrawn director's loan account that must be repaid to the company
- The liquidator finds evidence of wrongful trading — continuing to trade after there was no reasonable prospect of avoiding insolvency
- The liquidator finds evidence of fraudulent trading or another breach of director duties
These situations are the exception, not the rule. Most directors who have acted reasonably and sought help early are not personally pursued for company debts. Anyone weighing up their options before reaching this stage may find it useful to read about a director's rescue options to understand what alternatives exist before liquidation becomes the only route.
Personal guarantees and overdrawn director loans
Personal guarantees are the most common way a company debt turns into a personal one. If a director signed a personal guarantee for a bank loan, invoice finance facility, supplier account or commercial lease, that guarantee survives the company's liquidation. The lender or supplier can pursue the director directly for the outstanding balance once the company can no longer pay.
An overdrawn director's loan account works differently but has a similar effect. If a director has taken more money out of the company than they put in or were paid through salary and dividends, that balance is treated as a debt owed to the company. The liquidator has a duty to collect it in for the benefit of creditors, and will usually ask the director to repay it.
Directors who are unsure whether a guarantee or loan account applies to them, or who are weighing up whether to simply let the company close, may find it helpful to read whether you can walk away from your company's debts for a fuller picture of where personal exposure can arise.
HMRC and preferential creditor status
HMRC is treated differently from most other creditors in an insolvent liquidation. Certain taxes — including PAYE and employee National Insurance deductions, and VAT — are classed as secondary preferential debts, which means HMRC is paid ahead of floating charge holders and ordinary unsecured creditors, though after employee claims and fixed charge holders.
This preferential status can mean HMRC recovers more of what it is owed than other unsecured creditors, but it does not change the underlying principle: HMRC debt is a company debt and is written off with the rest once the company is dissolved, unless a director has personal exposure through a guarantee or a specific finding against them. Directors considering a formal closure process for an insolvent company are often looking specifically at a Creditors' Voluntary Liquidation (CVL), which is the usual route when a company cannot pay its debts as they fall due.
Official guidance on how creditors are ranked and paid is available from the Insolvency Service's creditor guide on GOV.UK, and the statutory order of priority is set out in the Insolvency Act 1986.
Frequently asked questions
Are all company debts wiped in liquidation?
Unsecured company debts are generally written off once the company is dissolved, because the company no longer exists to owe them. Debts covered by a personal guarantee, an overdrawn director's loan account, or a finding of wrongful or fraudulent trading are the main exceptions.
What about my supplier guarantee?
If you personally guaranteed a supplier account, that guarantee is a separate personal contract and survives the company's liquidation. The supplier can still pursue you directly for the outstanding balance.
Do directors have to pay company debts out of their own pocket?
Not usually. Directors are only personally liable where they gave a personal guarantee, owe money back to the company through an overdrawn loan account, or are found to have breached their duties, such as through wrongful trading.
Does HMRC debt get written off in liquidation?
Yes, in the same way as other company debts, once the company is formally dissolved. HMRC does have preferential status for certain taxes, meaning it is paid earlier in the process, but any shortfall is still written off with the company unless a director has personal exposure.
What happens to unpaid debts after liquidation is finalised?
Once the company is dissolved and removed from the Companies House register, any remaining unpaid company debts simply cease to exist as a claim against the company. Details of the dissolution are published in The Gazette, the official public record of company notices.
This article is general information, not legal, financial or insolvency advice, and every company's position is different.
If you'd like to understand how these rules apply to your situation, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.