When a company goes into liquidation in the UK, it can be an overwhelming and stressful time for directors, employees and creditors alike. Liquidation is often seen as a last resort, but for many businesses it can also be a structured and responsible way to deal with financial difficulties and bring matters to a close. Understanding what liquidation involves, what happens next and where to seek professional help can make the process far less daunting.
This guide explains what happens when a company goes into liquidation and how experienced insolvency practitioners, such as Purnells, can support directors through every stage.
What Does Liquidation Mean?
Liquidation is a formal insolvency process that results in a company being closed down. The business stops trading, its assets are sold, and the proceeds are used to repay creditors as fairly as possible. Once the process is complete, the company is dissolved and removed from the Companies House register.
There are two main ways a company can enter liquidation in the UK:
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Creditors’ Voluntary Liquidation (CVL): This occurs when directors decide the company can no longer pay its debts and choose to place it into liquidation voluntarily.
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Compulsory Liquidation: This happens when a creditor successfully applies to the court for a winding-up order, usually due to unpaid debts.
In both cases, a licensed insolvency practitioner is appointed to act as liquidator and manage the process.
What Happens When a Company Goes Into Liquidation?
Once a company goes into liquidation, a clear legal process begins:
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Appointment of a Liquidator
The liquidator takes control of the company. Directors’ powers effectively cease, and all decisions relating to the business are handled by the liquidator. -
Cessation of Trading
In most cases, the company stops trading immediately. Employees are made redundant and may be able to claim certain entitlements, such as unpaid wages or holiday pay, from the government’s redundancy scheme. -
Asset Valuation and Sale
Company assets are identified, valued and sold. These assets may include property, stock, machinery, vehicles or intellectual property. -
Payment to Creditors
Funds raised from asset sales are distributed to creditors in a strict legal order. Secured creditors are usually paid first, followed by preferential creditors (such as employees), and then unsecured creditors. -
Investigation of Director Conduct
The liquidator has a legal duty to review the actions of directors in the period leading up to insolvency. This is to ensure directors acted responsibly and did not worsen the position of creditors. -
Dissolution of the Company
Once all matters are concluded, the company is formally dissolved and ceases to exist.
What Does Liquidation Mean for Directors?
For many directors, the biggest concern is personal liability. While limited companies are separate legal entities, there are circumstances where directors may be held personally responsible.
Key issues include:
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Wrongful Trading: If directors continued trading when they knew, or should have known, that the company could not avoid insolvency.
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Personal Guarantees: Any personal guarantees given to lenders or suppliers may still be enforceable after liquidation.
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Overdrawn Director Loan Accounts: These may need to be repaid to the liquidator.
Seeking early advice from a licensed insolvency practitioner can help directors understand their position and reduce potential risks.
What About Employees and Shareholders?
When a company goes into liquidation, employees are usually made redundant. They may be able to claim certain payments from the Redundancy Payments Service, including redundancy pay, unpaid wages and holiday pay.
Shareholders, however, are unlikely to receive any return if the company is insolvent. Creditors take priority, and shareholders are only paid if all debts have been settled in full, which is rare in liquidation cases.
Can a Business Be Saved?
Liquidation does not always mean the end of the underlying business activity. In some cases, the assets of the company can be sold to a new business, allowing trading to continue under a different structure. This is sometimes referred to as a “phoenix” arrangement and must be handled carefully to comply with insolvency law.
In other situations, liquidation may be avoidable altogether if action is taken early. Alternatives such as administration or a company voluntary arrangement (CVA) may provide a route to rescue the business or restructure its debts.
Why Professional Advice Is So Important
When a company goes into liquidation, the decisions made can have long-lasting consequences. Insolvency law is complex, and mistakes can expose directors to unnecessary stress or financial risk.
Purnells are licensed insolvency practitioners with extensive experience helping UK directors navigate insolvency and liquidation. They provide clear, practical advice tailored to each business, ensuring directors understand their options and obligations at every stage.
Final Thoughts
If your company goes into liquidation, it is never an easy situation, but it can be the most responsible step when financial difficulties can no longer be overcome. With the right professional guidance, liquidation can be managed efficiently, legally and with minimal disruption.
If you are concerned about your company’s financial future, speaking to an experienced insolvency practitioner such as Purnells at an early stage can give you clarity, reassurance and control over what happens next.