This article is intended as a comprehensive guide to liquidation proceedings for company directors, explaining how it works, the liquidation process, and the consequences.
What Does it Mean to ‘Liquidate a Company’?
Liquidation, also known as winding up a company, is the process through which a company is closed and its assets are sold to pay its debts. In an insolvent liquidation there is usually nothing left once creditors have been paid, and shareholders receive nothing. Where a solvent company is wound up, or in the rarer case where an insolvent liquidation produces a surplus, what remains after the costs, the creditors and any statutory interest goes to the shareholders.
It is attempted when business rescue is no longer an option, and the best decision is to simply close down the company.
The liquidation of a company usually means employees lose their jobs, though not always immediately or in every case, and the company itself is eventually dissolved, although its business or assets may be sold and carry on under new ownership.
What are the Types of Company Liquidation?
Insolvent
If a company is insolvent (i.e. cannot pay its creditors as and when payments become due or its debts outweigh its assets on the balance sheet), the directors can recommend that the shareholders pass a special resolution to wind it up voluntarily. The directors must then ask the creditors to nominate the liquidator, and the creditors’ choice normally prevails. This is known as Creditors’ Voluntary Liquidation (CVL).
If you suffer from continual cash flow problems and cannot pay your bills, this is a very strong indication that you may be insolvent.
Insolvency, however, doesn’t always mean you need to liquidate. Insolvency practitioners are adept at business rescue processes such as administration.
The second possibility for insolvent companies is that they are forced into a compulsory liquidation procedure, by creditors.
Solvent
If the company is solvent, a Members’ Voluntary Liquidation is the appropriate method for liquidating a solvent limited company with assets.
Where an MVL is used, distributions are normally treated as capital rather than income, and Business Asset Disposal Relief, formerly called Entrepreneurs’ Relief, may reduce the Capital Gains Tax rate on a qualifying gain to 18% for disposals from 6 April 2026. It does not apply automatically: the qualifying conditions, the lifetime limit and anti-avoidance rules including the Targeted Anti-Avoidance Rule all have to be considered, so take tax advice on your own circumstances.
Read our full article on MVL’s here.
What Happens to a Company When it Goes into Liquidation?
The process is as follows.
Having recognised either the possibility or the fact of insolvency, you should make contact with an insolvency practitioner (IP).
In a creditors’ voluntary liquidation the shareholders pass a special resolution to wind up, and the company must advertise it in the Gazette (Official Journal of Public Record) within 14 days. Within 7 days of the resolution the directors must send the creditors a statement of affairs.
The directors must also ask the creditors to decide who the liquidator will be, by deemed consent or a virtual meeting, with a decision date no later than 14 days after the resolution. A physical meeting is held only if enough creditors ask for one. Once appointed, the liquidator must advertise the appointment in the Gazette and notify Companies House within 14 days.
Directors’ powers cease, and the IP takes over assessing what money exists to pay back creditors. In a voluntary liquidation employees are not automatically made redundant — some may be kept on to help wind the business down, or transferred to a buyer if part of the business is sold, though most will eventually be made redundant as trading stops.
Once the assets have been realised and distributed, the liquidator sends a final account to Companies House. The company is dissolved three months after the account is registered, unless the court defers the date.
Who is Paid First in a Liquidation?
The IP will have any assets independently valued then sold, and the money will be distributed to creditors in order of priority.
It is not one simple queue, and the common single-list version of it is misleading. Assets subject to a fixed charge are dealt with separately from the company’s free assets, and the prescribed part changes what unsecured creditors receive. In outline:
- Fixed-charge assets. Property subject to a valid fixed charge is realised for that lender, net of the costs of realising it. Only any balance left over falls into the general estate, and if the fixed charge is not cleared the shortfall ranks as an unsecured claim.
- Expenses of the liquidation. Paid out of the company’s uncharged assets and, if those fall short, out of floating-charge assets ahead of the floating-charge holder, in the statutory order.
- Preferential creditors. Ordinary preferential debts, principally employee claims within statutory limits, then secondary preferential debts, which include certain taxes HMRC collects from others such as PAYE, employee NIC and VAT.
- The prescribed part. Where there is a floating charge created on or after 15 September 2003, a prescribed part of the net floating-charge realisations is normally set aside for unsecured creditors before the floating-charge holder is paid. It can be disapplied where the sums are too small to justify a distribution, or by the court.
- Floating-charge holders, from what remains of the floating-charge assets.
- Unsecured creditors, sharing rateably in what is left, together with the prescribed part.
- Statutory interest on proved debts, where funds allow.
- Shareholders, if any surplus remains.
What are the Options for Liquidating my Company?
There are three main options for liquidating a company:
- Creditors’ Voluntary Liquidation (CVL): This is the most common type of liquidation, and it is used when a company is insolvent and cannot pay its debts. In a CVL, the company’s members formally nominate a liquidator, but under section 100 of the Insolvency Act 1986 the creditors’ nomination takes priority if they choose someone different — so it is the creditors, not the directors, who control the appointment. The liquidator will then sell off the company’s assets and distribute the proceeds to its creditors, in order of priority.
- Members’ Voluntary Liquidation (MVL): This type of liquidation is used when a company is solvent and the shareholders have decided to close the company down. In an MVL, the shareholders appoint a liquidator to oversee the liquidation process. The liquidator will then sell off the company’s assets and distribute the proceeds to the shareholders, after paying off any outstanding debts.
- Compulsory Liquidation (Winding Up): This type of liquidation follows a court winding-up order, usually made on a creditor’s petition, though the company, its directors, its shareholders and some public bodies can also petition. The most common ground is that the company is unable to pay its debts; the court can also wind a company up where it is just and equitable to do so. In a compulsory liquidation the Official Receiver, a civil servant of the Insolvency Service, becomes liquidator when the winding-up order is made. Creditors may later appoint a licensed insolvency practitioner in their place, or the Secretary of State may appoint one. The liquidator then realises the company’s assets and distributes them to creditors in the statutory order of priority.
The best option for liquidating your company will depend on your specific circumstances. If you are unsure which option is right for you, you should consult with a qualified insolvency practitioner.
How do I Liquidate my Company?
To liquidate your company, you will need to follow these steps:
- Choose the type of liquidation that is right for your company. This will depend on your company’s financial situation and the reasons for liquidation.
- If you are carrying out a CVL or MVL, you will need to pass a resolution to wind up the company. This is normally a special resolution, passed by at least 75% of the votes cast at a shareholders’ meeting or, for a private company, by a written resolution of members holding at least 75% of the voting rights.
- If you are carrying out a compulsory liquidation, you will need to apply to the court for a winding-up order.
- A liquidator is then appointed, in a way that depends on the type of liquidation. In an MVL the shareholders appoint the liquidator. In a CVL the company may nominate a liquidator, but the directors must seek the creditors’ nomination, and the creditors’ nominee normally becomes liquidator. In a compulsory liquidation the Official Receiver usually becomes liquidator when the winding-up order is made. If the company was in administration or a company voluntary arrangement just before, the court can appoint the administrator or the arrangement’s supervisor instead. The liquidator will then take control of the company and sell off its assets.
- The proceeds from the sale of the company’s assets will be used to pay off the company’s debts. If a liquidation produces a genuine surplus once the costs of the liquidation, the creditors and any statutory interest have been paid, the remaining funds go to the company’s shareholders according to their rights. That is the position in a members’ voluntary liquidation, and it is also the position in the rarer cases where a creditors’ voluntary or compulsory liquidation turns out to produce a surplus. Surplus funds do not go to the government.
The liquidation process can be complex and time-consuming, so it is important to seek professional advice from a qualified insolvency practitioner.
Can I Liquidate my own Company?
While this is a commonly asked question, the simple answer is no. The law requires that liquidation be carried out by a licensed insolvency practitioner.
If you are concerned that you won’t be able to afford the costs of liquidation, do give us a call to discuss your situation and we can try to explain the best deal available to you for a cost-effective insolvency. Liquidations are usually paid for, in any case, from the realisation of assets rather than the directors own finances. There are also options to pay for it via statutory directorial redundancy payments.
Can I Start a new Company after Liquidation?
Liquidation does not by itself stop you being a director again. In an insolvent liquidation, though, the liquidator must report on every director’s conduct, and a director the court finds unfit must be disqualified for 2 to 15 years. The name rules are a separate restriction. Anyone who was a director in the 12 months before an insolvent liquidation must not, for 5 years and without court leave or a statutory exception, be a director of, or manage, any company or unincorporated business using the same or a similar name. Breach is a criminal offence. Someone who manages a company in breach is also personally liable for the company’s debts incurred while they were involved in managing it. They are liable jointly and severally with the company, so a creditor can pursue them for the full amount. We explain the section 216 name rules in more detail here.
What Does Liquidation Mean for Employees?
Insolvent liquidation usually ends the company, and most employees will lose their jobs. Employees can claim what the company owes them in the liquidation. How much of that claim is paid depends on what the assets raise.
Separately, if the employer is insolvent and the employment has ended, employees can claim arrears of pay, holiday pay and notice pay from the National Insurance Fund, up to statutory limits, whether or not the company has assets. Employees with at least two years’ continuous service can also claim statutory redundancy pay. Certain unpaid pension contributions can be paid into the pension scheme.
How Long does it take for a Company to Liquidate?
It usually takes up to two weeks to appoint a liquidator, after which point the directors powers cease. Actually realising the assets of the company, however, is a more protracted process and varies hugely depending on the size and complexity of the company situation. On average it takes between 6 and 24 months to complete a liquidation.
How Much Does it Cost to Liquidate?
Most liquidations can be paid for out of either the assets sold by the liquidator, or directors’ redundancy payments.
Liquidations vary considerably in cost as the insolvency practitioner usually charges on a time basis which means the larger and complex the company the more hours will be spent.
Generally speaking the liquidation of a small business would be around £4000 to £6000 + VAT.
Do I Have to pay to Liquidate my Company? What if I Can’t Afford this?
Yes, there are costs associated with liquidating a company. These costs can vary depending on the size and complexity of the company, as well as the type of liquidation that is being pursued.
The following are some of the costs that you may need to pay when liquidating your company:
- Liquidator’s fees
- Legal fees
- Accounting fees
- Advertising costs
- Valuation costs
- Court fees
If you are unable to afford to pay the costs of liquidating your company, there are a few options that you may have:
- You may be able to negotiate a payment plan with the liquidator.
- You may be able to raise funds to cover the costs of liquidation by selling off some of the company’s assets.
- You may be able to find a liquidator who is willing to work on a contingency basis, meaning that they will only charge their fees if they are able to recover assets from the company.
What happens after I have liquidated my Company?
After you have liquidated your company, the following will happen:
- The company will be removed from the Companies House register.
- The company’s assets will have been sold off, and the proceeds will have been used to pay off the company’s debts.
- If a liquidation produces a genuine surplus once the costs of the liquidation, the creditors and any statutory interest have been paid, the remaining funds go to the company’s shareholders according to their rights. That is the position in a members’ voluntary liquidation, and it is also the position in the rarer cases where a creditors’ voluntary or compulsory liquidation turns out to produce a surplus. Surplus funds do not go to the government.
- The company will cease to exist.
Directors can usually start or join another company unless they are disqualified, but after an insolvent liquidation they must not use the same or a similar name for 5 years without court leave or a statutory exception.
Company Liquidation FAQs
How is a Company Liquidated?
In voluntary liquidation, the shareholders pass a special resolution to wind up the company. In an MVL they appoint the liquidator; in a CVL the creditors’ nomination normally decides which licensed insolvency practitioner becomes liquidator. In compulsory liquidation, a creditor (or the company, its directors or others) petitions the court. When the court makes a winding-up order, the Official Receiver usually becomes liquidator, and a licensed insolvency practitioner may later take over. If the company was in administration or a company voluntary arrangement just before, the court can appoint the administrator or the arrangement’s supervisor instead.
Who Handles the Liquidation Process?
A licensed insolvency practitioner acts as liquidator in voluntary liquidations. In a compulsory liquidation the Official Receiver usually becomes liquidator when the winding-up order is made, and a licensed insolvency practitioner may later be appointed in their place. If the company was in administration or a company voluntary arrangement just before, the court can appoint the administrator or the arrangement’s supervisor instead.
What Happens to Company Assets During Liquidation?
Assets are sold, and the proceeds are used to pay off creditors. Any remaining funds are then distributed among shareholders, if applicable.
What are the Consequences of Liquidation for Directors?
Directors may face personal financial loss, damage to reputation, and in cases of wrongful or fraudulent trading, they could face legal action or disqualification from being a director.
How Long Does the Liquidation Process Take?
The duration varies depending on the size and complexity of the company. It can take anywhere from a few months to several years.
Is Liquidation the Same as Bankruptcy?
No, liquidation applies to companies, whereas bankruptcy applies to individuals. However, both involve selling assets to pay off debts.
What Happens to Employees During Liquidation?
Employees are typically made redundant, though a liquidator can keep the business trading for a short period, or transfer staff to a buyer, before that happens. Redundant employees may claim outstanding wages, holiday pay, and redundancy payments from the government’s National Insurance Fund.