What happens if the company goes into liquidation?

Liquidation is the formal legal process for winding up a company that cannot — or no longer needs to — continue trading. It is not the same as administration, receivership, or a Company Voluntary Arrangement (CVA). Once a company enters liquidation, the goal is to realise assets, pay creditors in the statutory order, and dissolve the company at Companies House.

For directors of UK limited companies, understanding what liquidation means — including what it does not mean for them personally — is important. This guide covers the three types of liquidation, what happens to outstanding debts, and what to do if the company is heading towards difficulty.

The three types of company liquidation

Creditors’ Voluntary Liquidation (CVL)

The most common form. The directors and shareholders of an insolvent company agree to wind it up voluntarily — before a creditor forces the issue through the courts. A licensed insolvency practitioner (IP) is appointed as liquidator. The IP realises the company’s assets and distributes the proceeds to creditors in priority order.

A CVL is generally preferable to compulsory liquidation because it gives directors more control over the process, is faster, tends to produce a better outcome for creditors, and demonstrates that directors acted responsibly.

Members’ Voluntary Liquidation (MVL)

Used when a solvent company is wound up — where all creditors can be paid in full. Common reasons include: the company has completed its purpose, the shareholders want to extract retained profits in a tax-efficient way, or a business is being restructured and a subsidiary needs to be dissolved cleanly. An MVL is not a sign of financial distress.

Compulsory liquidation

Triggered by a court order, usually after a creditor successfully petitions to wind up the company because it has not paid an undisputed debt. A winding-up order is made; the court appoints the Official Receiver, who may then hand the case to a licensed insolvency practitioner. The company has no choice at this point.

Compulsory liquidation is the outcome that directors, creditors and the courts most want to avoid — it is slower, more costly, and typically produces the worst returns for unsecured creditors.

What happens to the company’s debts in liquidation?

The Insolvency Act 1986 sets a strict priority order for how the proceeds of liquidation are distributed:

1. Liquidation costs — the IP’s fees and the cost of realising assets come first.
2. Secured creditors with a fixed charge — those holding a legal mortgage or fixed charge over a specific asset (typically property) are paid from that asset.
3. Preferential creditors — principally employees (for outstanding wages up to statutory limits) and occupational pension contributions.
4. Secured creditors with a floating charge — typically a bank holding a debenture, after a ring-fenced Prescribed Part for unsecured creditors has been set aside.
5. Unsecured creditors — trade suppliers, HMRC for many liabilities, and most short-term business lenders. These creditors share whatever is left. In practice, unsecured creditors in an insolvent liquidation often receive a small dividend — or nothing.
6. Shareholders — any remaining surplus after all creditors are paid in full is returned to shareholders. In an insolvent liquidation this is typically nothing.

Once the liquidation is completed and distributions made, any remaining unsatisfied debts are extinguished. The company is dissolved and struck off the Companies House register.

The director’s personal position

A fundamental principle of company law is that a limited company is a separate legal person from its directors and shareholders. The company’s debts are not the director’s debts.

• No personal guarantee — if the director has not signed a personal guarantee, they are not personally liable for the company’s debts. Credicorp does not take personal guarantees; the loan is to the company only.
• No personal credit impact — the company’s insolvency does not appear on the director’s personal credit file. A CVL, MVL or compulsory liquidation are company events, not personal ones.
• Director disqualification — the liquidator is required by law to report on the director’s conduct. Directors who acted responsibly and in the interests of creditors as insolvency approached have nothing to fear. Directors found to have acted improperly may be disqualified from acting as a director for up to 15 years.
• Wrongful trading risk — if a director continued to allow the company to trade and incur debt when they knew (or ought to have known) that insolvent liquidation was unavoidable, a court can order them to make a contribution to the company’s assets. This is rare but serious. The defence is to take every step to minimise losses to creditors — including seeking professional advice promptly.

How to avoid liquidation

If the company is struggling, the most important thing is to act early and seek professional advice. Options before liquidation include:

• Informal creditor negotiation — contacting creditors directly to agree extended payment terms or a reduced settlement.
• Company Voluntary Arrangement (CVA) — a formal, legally-binding agreement with creditors to repay a proportion of debts over time, supervised by an insolvency practitioner. The company continues to trade.
• Administration — a rescue procedure aimed at saving the company, achieving a better outcome for creditors than liquidation, or realising assets for secured creditors. The company is protected from creditor action during administration.
• Pre-pack administration — the business and assets are sold, often to a new vehicle, immediately after the company enters administration. The trade can continue; the old company’s debts remain with the old entity.

An insolvency practitioner will advise on the most appropriate route. The sooner directors seek that advice, the more options are available.

Frequently asked questions