Company liquidation UK: what happens when a company is wound up

Company liquidation is the formal process of closing a limited company or partnership. It involves stopping business operations, selling assets to pay debts, and removing the entity from the Companies House register. Whether a business is solvent or struggling with debt, understanding the legal pathways around insolvency is vital. If you are facing financial distress, you should consult a commercial law solicitor to protect your interests. This guide explains the three liquidation routes and what happens when a company is liquidated.

Quick answer: How to liquidate a company in the UK

To liquidate a company, directors must choose a route based on solvency. If the business can pay its debts, you use a Members’ Voluntary Liquidation (MVL). If it is insolvent, you use a Creditors’ Voluntary Liquidation (CVL) or wait for a court-ordered Compulsory Liquidation. Each process requires an authorised insolvency practitioner to sell assets and settle legal disputes.

If you are unsure which path to take, professional advice is essential to avoid personal liability.

Understanding the three main routes of company liquidation

When a company liquidation begins, the goal is to wind up its affairs and strike it off the register at Companies House. There are three primary methods to achieve this in the United Kingdom.

1. Members’ Voluntary Liquidation (MVL): For solvent companies (e.g., due to retirement). Directors must swear a “declaration of solvency,” confirming all debts can be paid within 12 months. False declarations are a criminal offence.
2. Creditors’ Voluntary Liquidation (CVL): For insolvent companies where directors choose to stop trading. Shareholders must pass a special resolution (75% majority by share value) to proceed, and creditors help appoint the liquidator.
3. Compulsory Liquidation: A court-ordered process, typically triggered when a creditor owed £750 or more issues a winding-up petition. Directors may also apply if they cannot secure shareholder agreement for a CVL.

Comparison of Insolvent Liquidation Routes

How a liquidation is managed: The role of the liquidator

Liquidation is overseen by an authorised insolvency practitioner or the Official Receiver, who takes full control of the company. Once appointed, the directors’ powers cease.

The liquidator’s core duties are:

• Asset Realisation: Identifying and selling all company assets.
• Debt Collection: Pursuing money owed to the company.
• Legal Disputes: Settling ongoing litigation or claims.
• Distribution: Paying creditors based on a strict legal order of priority.
• Investigation: Reviewing directors’ conduct for the three years prior to insolvency.

Case Study:

If a construction firm enters a CVL and the liquidator discovers directors sold a £5,000 company van to a relative for £100 just before liquidating, the liquidator can reverse this “undervalue transaction” to recover funds for creditors.

What happens when a company goes into liquidation for employees

When a company is liquidated, it usually stops doing business immediately. This has a direct impact on the workforce.

• Contract Termination: Employee contracts are typically terminated automatically when a winding-up order is made or a liquidator is appointed.
• Claiming Unpaid Wages: Employees become preferential creditors for some parts of their claim. If the company has no assets, employees can claim redundancy pay, unpaid wages, and holiday pay from the government’s Redundancy Payments Service (RPS).
• TUPE Transfers: In some voluntary liquidations where the business is sold as a going concern, employee contracts might transfer to the new owner under TUPE (Transfer of Undertakings (Protection of Employment)) Regulations. However, in most terminal liquidations, this does not apply.

Creditors and the order of priority for fund distribution

The liquidator must follow a strict legal hierarchy when paying out money. This is why unsecured creditors often receive very little.

1. Costs of Liquidation: This includes the liquidator’s fees and expenses.
2. Secured Creditors (Fixed Charge): Usually banks with a mortgage over a specific building.
3. Preferential Creditors: This includes certain employee claims and HMRC (for taxes like VAT and PAYE).
4. Secured Creditors (Floating Charge): Debts secured against assets that change, like stock or raw materials.
5. Unsecured Creditors: Suppliers, contractors, and customers who paid in advance.
6. Shareholders: They are at the very bottom and only receive money if every other debt is paid in full.

Example Scenario:

If a retail shop closes with £50,000 in assets but owes £100,000 to a bank and £20,000 to suppliers, the bank (secured creditor) will likely take the entire £50,000, leaving the suppliers with nothing.

What happens to a director of a company in liquidation

Many people ask, “what happens to a director of a company in liquidation?” The answer depends entirely on their conduct.

Directors have a legal duty to cooperate with the liquidator. This includes attending interviews and handing over all books and records. After the company is liquidated due to insolvency, the Official Receiver or liquidator submits a conduct report to the Insolvency Service.

Unfit Conduct and Disqualification

If the investigation finds “unfit conduct,” a director can face serious sanctions, including disqualification from directorship for two to fifteen years. Examples of unfit conduct include:

• Continuing to trade when the company could not pay its debts.
• Failing to keep proper accounting records.
• Using company money for personal benefit while creditors were not being paid.
• Failing to pay taxes owed to HMRC.

Disqualified directors cannot manage, form, or promote any limited company without court permission. They may also be made personally liable for company debts if found to have engaged in wrongful or fraudulent trading.

Restrictions on reusing a company name after insolvent liquidation

Under section 216 of the Insolvency Act 1986, there is a strict five-year restriction on directors of an insolvent company reusing the same or a similar name for a new business. This is to prevent “phoenixism,” where a company folds to shed its debts and re-emerges under the same name.

A “banned name” includes:

• The registered name at Companies House.
• Any trading name used in the twelve months before liquidation.

The three exceptions to the ban:

1. Sale by Liquidator: If the new company buys the business from the liquidator and gives formal legal notice to all creditors.
2. Court Permission: The director applies to the court within seven days of the start of the liquidation for permission to use the name.
3. Existing Use: If the director is involved with another company that has already been using that name for at least twelve months before the liquidation.

FAQs

How long does it take to liquidate a company?

Appointing a liquidator usually takes a few weeks. A straightforward liquidation often takes around six to twelve months, but complex cases involving disputes or difficult-to-realise assets may take longer.

How much does it cost to liquidate a company?

A voluntary liquidation typically costs around £3,000 to £5,000 plus VAT. These fees are usually paid from company assets. If there are no funds, directors may need to cover the cost. Compulsory liquidation involves court and petition fees.

What happens when a company goes into liquidation regarding its assets?

The liquidator takes control of the company’s assets, sells them, and distributes the proceeds to creditors according to legal priority. Contracts may be terminated or disclaimed as part of the process.

Liquidation is the final stage of a company’s life. Whether it is a voluntary choice for a solvent business (MVL) or a necessary step for an insolvent one (CVL or Compulsory), it requires strict adherence to UK insolvency laws. Directors must prioritise the interests of creditors once insolvency is suspected to avoid disqualification and personal liability. While the process may seem daunting, professional guidance from an insolvency practitioner and a specialist solicitor can ensure that the winding-up is handled legally and efficiently.

Disclaimer: This guide provides general information only and does not constitute legal advice.

KEY TAKEAWAYS:

• There are three types of company liquidation: Members’ Voluntary Liquidation (solvent), Creditors’ Voluntary Liquidation (insolvent and voluntary), and Compulsory Liquidation (insolvent and court-ordered).
• Directors face serious investigations: The liquidator must report on director conduct, and “unfit” behaviour can lead to disqualification for up to fifteen years and personal liability for company debts.
• Strict rules apply to reusing company names: Under Section 216, directors of an insolvent company are banned for five years from using the same or a similar name unless they qualify for a specific legal exception.