Company Liquidation

What is company liquidation?

Company liquidation is the formal process of bringing a limited company to an end. A licensed insolvency practitioner is appointed as liquidator to take control of the company’s affairs, realise its assets by selling anything of value, investigate the conduct of its directors, and finally distribute the proceeds to creditors in the order of priority set out in the Insolvency Act 1986.

Once the liquidation process is complete, the company is dissolved and removed from the register at Companies House where it then ceases to exist as a legal entity.

Liquidation applies to limited companies. If you are a sole trader or a partner in a business partnership, different insolvency options apply. Liquidation can be initiated voluntarily by the company’s directors and shareholders, or it can be forced by a creditor through the courts.

“Liquidation is a word that understandably worries directors, but in many cases it’s actually the most responsible course of action for all parties. It protects creditors, gives employees access to their statutory redundancy entitlements, and draws a clear line under the company’s affairs so that everyone, including its directors can move forward.”
— Julie Palmer, Partner, BTG Begbies Traynor

The three types of company liquidation

There are three type of liquidation, and the one that is appropriate for your company depends on two things: whether the company is solvent or insolvent, and whether the process is voluntary or forced by a creditor.

Creditors’ Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation (CVL) is the most common form of company liquidation in the UK. It is used when a company is insolvent, meaning it cannot pay its debts as they fall due or its liabilities exceed the value of its assets, and the directors decide to close the company voluntarily rather than waiting for a creditor to force the winding up

In a CVL, you as the director make the decision to liquidate. A licensed insolvency practitioner is appointed as liquidator, the company’s assets are sold, and the proceeds are distributed to creditors. Any debts that remain unpaid after the process are written off, unless you have personally guaranteed them.

A CVL is almost always preferable to being forced into compulsory liquidation because it demonstrates that you acted responsibly, gives you more control over the process, and typically leads to a better outcome for creditors. It also protects employees, who can access the Redundancy Payments Service for unpaid wages and statutory entitlements.

A straightforward CVL typically takes between 12 and 18 months to complete, although this varies depending on the complexity of the company’s affairs. For full details on the process, costs, and timeline, see our complete guide to CVL.

Members’ Voluntary Liquidation (MVL)

A Members’ Voluntary Liquidation (MVL) is used to close down a solvent company which is no longer needed. An MVL is not an insolvency procedure; it is a formal, tax-efficient way for directors and shareholders to extract the value from a company that has reached the end of its useful life.

The key advantage of an MVL over a simple voluntary strike off is the tax treatment. Distributions from an MVL are treated as capital gains rather than income, which means they qualify for Capital Gains Tax rates and, in many cases, Business Asset Disposal Relief (BADR) at 18%. For companies with more than £25,000 in retained profits, this can represent a significant tax saving compared to taking the money out as dividends.

Directors of the company must sign a Declaration of Solvency confirming that the company can pay all its debts within 12 months. Providing a false declaration is a criminal offence, so it is essential that the company’s solvency is properly assessed by a licensed insolvency practitioner before proceeding.

For full details on eligibility, tax benefits, and the MVL process, see our complete guide to MVL.

Compulsory Liquidation

Compulsory liquidation is the court-ordered closure of an insolvent company, forced by a creditor who has petitioned for the business to be wound up due to non-payment of debts. It is initiated through a winding-up petition, which is the most serious legal action a creditor can take against your company.

Unlike a CVL, compulsory liquidation is not your decision. It is forced upon you by a creditor, most commonly HMRC. Once a winding-up order is granted by the court, an Official Receiver is appointed to take immediate control of the company. Your bank accounts are frozen, trading ceases, and employees are made redundant.

The investigation into your conduct takes into account the fact that you did not take action voluntarily once you realised, or ought to have realised, that the company was insolvent.

“Compulsory liquidation should always be a last resort. If your company is insolvent and a creditor is threatening a winding-up petition, entering a CVL before the petition is filed gives you significantly more control over the process.”
- Julie Palmer, Partner, BTG Begbies Traynor

If your company is facing a winding-up petition, it may still be possible to prevent compulsory liquidation. See our guides to winding-up petitions and statutory demands for your options.

How do the three types of liquidation compare?

What does a liquidator do?

In all three types of liquidation, a liquidator is appointed to manage the process. In a CVL or MVL, this is a licensed insolvency practitioner chosen by the directors. In a compulsory liquidation, the Official Receiver is appointed initially, although an insolvency practitioner may be appointed subsequently.

The liquidator’s responsibilities include taking control of the company’s assets, valuing and selling the company’s assets to generate funds for creditors, investigating the conduct of the company’s directors in the period leading up to insolvency (in CVLs and compulsory liquidations), distributing the proceeds to creditors in the statutory order of priority, assisting employees with claims through the Redundancy Payments Service, filing a report on director conduct with the Secretary of State, and applying to Companies House to dissolve the company once the process is complete.

The liquidator acts as an officer of the court and owes a duty to all creditors as a whole. They are regulated by their recognised professional body (IPA, ICAEW, or ICAS) and must comply with the Insolvency Code of Ethics.

Who gets paid first in a liquidation?

When a company enters liquidation, the proceeds from the sale of its assets are distributed to creditors in a strict order of priority set out in the Insolvency Act 1986:

1.     Costs of the liquidation process – These are the fees charged by the insolvency practitioner for handling the liquidation process

2.     Fixed charge holders - Secured creditors with a fixed charge over specific assets (e.g. a mortgage lender)

3.     Preferential creditors - Employees for unpaid wages (up to the statutory cap) and, since December 2020, HMRC have secondary preferential status for certain taxes including VAT and PAYE

4.     Prescribed part - A ring-fenced fund from floating charge realisations, set aside for unsecured creditors

5.     Floating charge holders – These are creditors with a floating charge over general company assets

6.     Unsecured creditors – Usually the biggest body of creditors which include trade suppliers, HMRC for corporation tax, landlords, and any other creditors without security

7.     Shareholders – This only applies in a solvent liquidation (MVL); in an insolvent liquidation, shareholders rarely receive anything

For a detailed breakdown, see our guide to who gets paid first when a company goes into liquidation.

What happens to directors when a company is liquidated?

Once an insolvency practitioner is appointed they immediate assume control of the company. You must cooperate fully with the liquidator’s requests for information and access to records.

In a CVL or compulsory liquidation, the insolvency practitioner is duty-bound to investigate the conduct of directors in the period leading up to it becoming insolvent. They are required to submit a report to the Secretary of State, and if evidence of wrongful or fraudulent trading or other misconduct is found, this could lead to personal liability, a contribution order, or director disqualification for up to 15 years.

However, for the vast majority of directors who have acted honestly and sought advice at an appropriate time, the investigation is a straightforward process. Directors are not automatically personally liable for company debts as personal liability only arises in specific circumstances such as personal guarantees, outstanding overdrawn directors’ loan accounts, or wrongful trading.

What happens to employees when a company is liquidated?

When a company enters insolvent liquidation (CVL or compulsory), all employees are automatically made redundant. Employees become preferential creditors for unpaid wages and holiday pay, meaning they are paid ahead of most other unsecured creditors.

If the company’s assets are insufficient to cover what employees are owed, they can claim from the Government’s Redundancy Payments Service (RPS). This covers unpaid wages (up to 8 weeks, capped at the current statutory weekly limit), accrued holiday pay (up to 6 weeks), statutory notice pay, and statutory redundancy pay for employees with two or more years’ continuous service.

“Concerns over what happens to their employees is one of the most common things directors raise when they contact us about liquidation. Many have delayed seeking advice because they’re worried about their staff. We always make supporting employees through the process a priority, ensuring they understand their entitlements and helping them access the Redundancy Payments Service as quickly as possible.”

Which type of liquidation is right for my company?

Choosing the right type of liquidation process depends on your company’s financial position at the time of liquidation:

1.     Your company is solvent and you want to close it: If your company can pay all its debts in full within 12 months and has retained profits or assets to distribute to shareholders, an MVL is the most tax-efficient route. If the total distribution is £25,000 or less, a voluntary strike off may be simpler and cheaper.

2.     Your company is insolvent and you want to close it voluntarily and avoid court action: If your company cannot pay its debts and there is no realistic prospect of rescue, a CVL is the most appropriate route. It puts you in control and demonstrates that you acted in creditors’ interests.

3.     Your company is insolvent but may be able to be rescued: If the underlying business is viable but carrying unmanageable debt, liquidation may not be the only option. A Company Voluntary Arrangement (CVA) or company administration could allow the business to continue trading while its debts are restructured. A licensed insolvency practitioner will be able to talk you through your options for rescue and suggest the best route forward.

4.     You have received a statutory demand or winding up petition: If a creditor has issued a statutory demand or winding-up petition against your company, you are at risk of having your company forced into compulsory liquidation. However, it may still be possible to prevent this by entering a CVL, negotiating with the creditor, or proposing an alternative insolvency procedure. Acting quickly is essential when a creditor has started this type of winding up action against your company.

If you’re unsure which route applies to your situation, a free initial consultation with a BTG Begbies Traynor licensed insolvency practitioner will give you a clear answer.

What happens after liquidation?

Once the liquidation process is complete and the company is dissolved at Companies House, you are generally free to become a director of another company, provided the liquidator’s investigation found no wrongdoing and you have not been subject to a director disqualification order.

If you are planning on setting up a new limited company, you need to be aware that there are restrictions on re-using the same or a similar company name within 12 months of the liquidation under Section 216 of the Insolvency Act 1986, unless specific exemptions apply. Your insolvency practitioner will advise you on this. For more detail, see our guide to phoenix company rules.

Many of the directors we work with go on to start successful new businesses. Liquidation is not the end of the road; it is a way of drawing a line under a situation that has become unworkable, so you can move forward.

Why choose BTG Begbies Traynor?

BTG Begbies Traynor handles more company liquidations than any other firm in the UK. With 100 licensed insolvency practitioners operating from more than 100 offices nationwide, we have the scale, expertise, and local presence to support you whatever your circumstances.

When you contact us, a licensed insolvency practitioner will assess your company’s financial position, explain your options clearly, and recommend the most appropriate route, whether that is liquidation, rescue, or something else entirely.

For a full list of our licensed insolvency practitioners and their regulatory bodies, see our recognised professional bodies page.

How BTG Begbies Traynor can help

If you’re considering liquidating your company, or if you’re unsure whether liquidation is the right option, the most important step is getting clear, honest advice from someone who has guided thousands of directors through this process.

Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation with a licensed insolvency practitioner.