What is company liquidation?
Company liquidation is the formal process of closing a limited company and winding up its affairs. It involves selling the company assets, paying creditors in a set order of priority, and distributing any surplus to shareholders. Once liquidation is complete, the company is dissolved, removed from the Companies House register and ceases to exist.
People often ask what liquidation actually means for a business and the people who run it. This guide explains what liquidation is, the three types used in the UK, why companies go into liquidation, and what happens to directors, employees, assets and debts along the way.
What does liquidation mean?
Liquidation means turning a company assets into cash so its debts can be paid and the company can be closed. A licensed insolvency practitioner is appointed as liquidator to take control, sell the assets, agree creditor claims and distribute the proceeds according to the law. When the process ends, the company is struck off the register and no longer exists.
Liquidation is not the same as insolvency. Insolvency is a financial position, where a company cannot pay its debts. Liquidation is one way of dealing with a company, and it can apply to solvent companies too, not only insolvent ones. For the underlying definition, see our answer to what is insolvency.
What are the types of company liquidation?
There are three main types of liquidation in the UK. Two are voluntary, started by the company, and one is compulsory, forced by the court.
Members' voluntary liquidation (MVL)
A members voluntary liquidation is a solvent liquidation, used when a company can pay all its debts in full but the owners want to close it and distribute the value. It is a tax-efficient way to wind up a solvent company, because the funds paid to shareholders are usually treated as capital, which may qualify for Business Asset Disposal Relief. Our guide to members voluntary liquidation explains this route in detail.
Creditors' voluntary liquidation (CVL)
A creditors voluntary liquidation is used when a company is insolvent and cannot pay its debts. It is started by the directors once they accept the company cannot continue, and it gives them more control over timing and the choice of liquidator than a court process would. See our creditors’ voluntary liquidation service for how it works.
Compulsory liquidation
Compulsory liquidation is forced on an insolvent company by the court, usually after a creditor presents a winding up petition. Control passes to the Official Receiver, and possibly to an appointed insolvency practitioner. Our compulsory liquidation page covers petitions, orders and the options available.
Why does a company go into liquidation?
A company goes into liquidation either because it is insolvent and cannot continue, or because its owners choose to close a solvent company in an orderly way. Insolvent liquidations are the more common. They usually follow a period of cash flow pressure, mounting creditor demands or the loss of a major customer or contract.
Common triggers include tax arrears with HMRC, unaffordable debt, a bad debt from a customer failure, the end of a key contract, or simply a business that is no longer viable. Sometimes liquidation is chosen; sometimes, as with a winding up order, it is imposed. Either way, taking advice early gives directors more say in how it happens.
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What happens during the liquidation process?
In outline, liquidation follows a consistent sequence, whether it is voluntary or compulsory:
- A liquidator, who must be a licensed insolvency practitioner, is appointed to take control of the company.
- The directors powers cease, and they hand over the books, records and assets and cooperate with the liquidator.
- The company assets are identified, valued and sold (asset realisation).
- Creditor claims are agreed, and the proceeds are distributed in the statutory order of priority.
- The liquidator investigates the causes of failure and the conduct of the directors.
- The company is dissolved and removed from the Companies House register.
The time this takes varies. A straightforward case with few assets can conclude relatively quickly, while a complex case with disputes, recoveries or investigations can run for much longer.
What happens to company debts when it is liquidated?
When an insolvent company is liquidated, its assets are shared among creditors in a strict order of priority set by law. Any debts that cannot be paid from the assets are written off when the company is dissolved, unless someone else, such as a director who gave a personal guarantee, is separately liable for them.
The broad order of priority is:
- Secured creditors with a fixed charge, such as a lender with a mortgage over property.
- The costs and fees of the liquidation.
- Preferential creditors, which include employees for certain unpaid wages and holiday pay, up to the statutory limits.
- Secondary preferential creditors, which include HMRC for taxes the company collected on its behalf, such as VAT, PAYE and employee National Insurance.
- Floating charge creditors, subject to a portion being set aside for unsecured creditors (the prescribed part).
- Unsecured creditors, including trade suppliers and HMRC for taxes the company itself owed, such as corporation tax.
- Shareholders, only if anything remains once all creditors are paid in full.
This is why the label people sometimes use, that HMRC is simply an unsecured creditor, is not quite right. HMRC ranks as a secondary preferential creditor for the taxes a company collects on its behalf, and as an ordinary unsecured creditor for the rest.
What happens to directors when a company is liquidated?
When a company is liquidated, the directors lose their powers and their role becomes cooperating with the liquidator. The liquidator reviews the conduct of the directors and reports on it, but for most directors of a failed company that is the end of the matter: they face no personal liability and are not disqualified.
Personal exposure arises in specific situations, such as an overdrawn director loan account, a personal guarantee, wrongful trading, or unlawful dividends. Our Director’s Guide to Company Insolvency explains these duties and how directors can protect themselves. Directors of a liquidated company can usually start again with a new company, subject to the rules on reusing a company name.
What happens to employees and assets?
In an insolvent liquidation, employees are usually made redundant when the company stops trading. They become creditors for wages, holiday pay, notice pay and redundancy, and can claim what they are owed from the Redundancy Payments Service up to the statutory limits. Company assets are sold by the liquidator, with the proceeds distributed to creditors in the order of priority above.
Assets subject to a valid charge, such as a debenture, are dealt with according to the lender security. In some cases directors buy back business assets from the liquidator at market value to continue trading through a new company, a route sometimes described as a phoenix. This is lawful when done properly and at a fair value, but it is subject to strict rules.
What is the difference between liquidation and administration?
Liquidation closes a company; administration tries to save it. Administration is a rescue process that protects a viable business from creditor action while an administrator seeks the best outcome, which may be a sale, a restructuring or a return to the directors. Liquidation, by contrast, is about winding the company up and distributing its assets. If the business is worth saving, company administration may be the better route; if it is not, liquidation brings an orderly end.
Is liquidation the same as dissolution or striking off?
No. Dissolution is the final act that removes a company from the register, and it happens at the end of a liquidation. Striking off is a separate, simpler way to close a company that has no significant debts and is not needed any more, done by application to Companies House rather than through a liquidator. Striking off is not appropriate for an insolvent company with creditors, because those creditors can object and have the company restored. Liquidation is the correct route where a company owes money it cannot pay.
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What should directors do if liquidation is likely?
If your company is struggling, the most important thing is to act early. In practice that means:
- Keep accurate records, monitor cash flow closely, and do not transfer assets out of the business.
- Speak to a licensed insolvency practitioner, and follow the advice, rather than waiting until it is too late.
- Take every step to protect the interests of creditors once the company is insolvent, because continuing to trade could increase personal risk.
- Explore all the options, including trading on, restructuring, refinancing or a company voluntary arrangement.
- Communicate with stakeholders, since transparency builds trust and can buy time.
Can liquidation be avoided?
Sometimes, if the business is viable and directors act early enough. Liquidation is the right answer when a company genuinely has no future, but it is not the only option for a company in difficulty. Where there is an underlying viable business, a rescue may be possible instead.
Alternatives worth considering before liquidation include a company voluntary arrangement (CVA), which lets a company repay creditors over time while it keeps trading, and company administration, which protects the business while a rescue or sale is arranged. Refinancing or restructuring can also turn a position around. The earlier you take advice, the more of these routes remain genuinely open; once a winding up petition has been advertised, the choices narrow quickly.
How much does liquidation cost?
There is no single price for liquidating a company, because the cost depends on the size and complexity of the case rather than a fixed fee. The liquidator fees and costs are normally paid from the money raised by selling the company assets, so in a case with assets they come out of the estate before creditors are paid.
Where an insolvent company has few or no assets, the directors may need to fund the cost of putting it into a creditors voluntary liquidation. We will always explain the likely cost and how it will be met before any process begins, so there are no surprises. We do not compete on being the cheapest; we focus on doing the job properly and proportionately to the case.
How we can help
We are licensed insolvency practitioners regulated by the ICAEW, based in Norwich and working across East Anglia and nationally. We have helped many directors through business distress and liquidation, and we can explain the options in plain terms and, where a formal process is needed, carry it out properly. Where a business can be rescued instead of closed, we will say so.
The first conversation is free and confidential. To talk to a licensed insolvency practitioner about liquidation, book free initial advice or call 0800 331 7417. This guide is general information and not advice about your own situation, which always needs a conversation with a licensed insolvency practitioner.
