Post updated 11th April 2025
We get asked a lot of questions about company liquidation. Clients are often unsure what it is exactly, and whether it can be beneficial to their business.
As such, we’ve put together a quick guide that explains exactly what company liquidation is, the effect it can have on your business and the steps you need to take to make it happen.
What is meant by liquidation of a company?
Liquidation is part of a business closure in which a company’s assets are sold (or liquidated) in order to pay off creditors.
It is the process taken when closing a limited company, selling assets and dissolving the company from the official register.
This process tends to happen if you have cash flow problems on a regular basis and creditors are threatening to take enforcement action.
There are two types of liquidation that can be started by the directors of a company and it will depend on the situation of your company as to which is the right one to use:
Creditors’ voluntary liquidation (CVL) – Used when a company is insolvent (which means it cannot pay its debts as and when they fall due. This is also used if you have assets that can be sold to generate cash or owe people money)
Members’ voluntary liquidation (MVL) – Used when your company is solvent but you want to retire or you no longer need or want the company.
There is a third type of liquidation called compulsory liquidation, this is one that is forced upon the company by unhappy creditors and has to be processed through a court.
Is liquidation good for a company?
Whether liquidation is good or bad will depend on the circumstances of the company and the owner’s wishes.
While closing a business down can be upsetting for some, there are also some advantages to liquidating your company. Chief among those is the fact that you don’t have to leave the world of business altogether.
Instead, you can have a clean slate and start fresh.
- Eradicates the debt
The liquidation will write off the company debts once the assets have been sold off and whatever monies are raised are used to clear as much of the company’s outstanding debt as possible.
In most cases, some creditors will have to accept a loss; they won’t be happy, but it will be a weight off your mind.
- Eases the pressure
Although the liquidation process is difficult, you will not be undertaking it – the liquidators will, so this gives you time to breathe and take stock.
If you want to start a new business, you can get on with it and get back to asking investors to work towards a new successful business rather than paying off debt.
- Employees get paid redundancy
The cost of redundancies and restructuring do not apply as the company does not have the money to pay it. Another bonus is that the redundancies will be made by the liquidator, it may not eradicate bad feeling but it’s not your decision.
Employees will also be paid redundancy, even if there aren’t enough assets to cover the cost, this payment comes from the government. Directors of the company are also able to claim for redundancy pay; the average claim is currently around £9,000.
- It may not cost you anything
The initial cost of preparing the statement of affairs is usually relatively low and the remaining costs are taken from the sale of the company’s assets, so it won’t cost much for all the work to be done for you. And, as outlined above you may be able to claim for redundancy. If so, this can be used towards liquidation costs too.
What is the downside of liquidating a company?
It’s never fun to close down a company that you’ve worked so hard to build up. Alongside that, there are a handful of other potential drawbacks to some liquidations.
- Making staff redundant
When businesses are closed down, it’s sadly inevitable that any staff they had will be made redundant. This can be one of the most upsetting factors to liquidation for many directors.
- Personal guarantees will have to be paid
Usually, a limited company liquidation protects directors from any personal liability. However, if there has been any finance taken out using a personal guarantee, this will need to be repaid.
- Public procedure
Liquidations are announced in The Gazette, a free-to-access website alongside other closure details.
Case study:
After 40+ years of trading, the director of a freight-forwarding service sadly passed away. Inheriting the company was our client, his daughter, but what she found was a business struggling to pay its bills and irate suppliers cancelling contracts.
Without any scope for recovery, we recommended that the company was liquidated. By taking the reins of the business, we were able to remove all of the stress of angry creditors and the closure process for our client at a time of high emotion.
Case handler for this, Emma Blyth explained that “the client was keen to see that the remaining staff were given the redundancy payments they were due, and the company’s liquidation was able to provide this too.”
What happens when a company is in liquidation?
In general, a third party will oversee the sale of the company’s assets in order to raise enough money to pay its creditors. There are several stages that a liquidation will commonly go through.
- Make an appointment
The first thing you need to do is find an insolvency practitioner, this is the person who will be in charge of the liquidation process.
They will gather the information they need from the director and then official documents will be written up.
- Gazette publication
It is mandatory that all companies proposing closure must be advertised in the London Gazette as it enables them to submit their claims to the correct party.
- Meeting of Creditors
The next step is to correspond with creditors, they will either be notified at least 7 days before the creditors meeting or given notice that unless they object the process will be going ahead.
Creditors will vote to confirm that liquidating the company is the best option and that the liquidator can be officially appointed to oversee the liquidation.
- Liquidation
The firm’s assets will be sold at their highest possible value and the cash will be used to pay off any company liabilities.
The directors do have the chance to buy the assets themselves, however the price must match that of an independent valuation.
After all the assets have been sold, the cost of the liquidation will be paid and creditor claims will be settled.
Is liquidation the same as closing?
Not necessarily. There are other types of company closure, such as dissolution, that don’t involve the liquidation of assets. In general, while a closure needn’t involve liquidation, liquidation always involves a closure.
Who benefits from liquidation?
A good liquidation can benefit both creditor and business owner. As there is an attempt to pay the company’s debts off, this benefits its creditors. Because it’s an effective way to solve business debts, it’s also beneficial to company owners.
Who gets paid first in liquidation?
- Secured creditors with fixed charges
- Preferential creditors (staff wages, etc.)
- Secondary preferential creditors (VAT, NI contributions, etc.)
- Secured creditors with floating charges
- Unsecured creditors
- Shareholders
What happens to a director of a company in liquidation?
As directors are subject to a thorough investigation into their conduct as part of a liquidation, the consequences of the process depend on the director’s conduct. In most cases, nothing happens to the director at all. If, however, any evidence of misconduct is found, a disqualification from acting as a director can be implemented.
How long can a company stay in liquidation?
There is no maximum time limit for a company to stay in liquidation. Typically, the process takes between 6-24 months to complete but can take longer should there be any disputes along the way.
Do contracts terminate on liquidation?
Any contracts will have already been terminated before a liquidation is completed. As part of the process, the business must cease trading immediately. Creditors are also involved in the process during meetings and are notified by the liquidator early on. Any staff, meanwhile, should have been let go once the business stopped trading.
Looking at closing down your business?
Liquidation offers a quick, clean closure that allows you to focus on your next venture. Find out if your business qualifies with our Limited Company Liquidation Test.
Can a company be saved from liquidation?
There are many options available to companies worried that they might become insolvent. If they’ve already entered into liquidation, however, it is very difficult to reverse.
While technically possible to reverse a voluntary liquidation within 6 years of the formal dissolution, it’s very difficult and requires a court order and a great deal of legal work.
Understanding the different types of company liquidation
Solvent Liquidation
Solvent liquidation, also known as a members’ voluntary liquidation, is when the directors and shareholders have the choice to close their limited company down, with the intention of withdrawing cash or assets in a tax-efficient way. This process can take anywhere between six and 24 months, but this of course depends on the company’s current position.
Insolvent Liquidation
Insolvent liquidation or creditors’ voluntary liquidation, means that your company is having to close because it can’t pay its bills or debt anymore, or the value of the business assets is less than its liabilities. Similar to solvent liquidation, this process roughly takes between 6 – 24 months.
Compulsory Liquidation
Compulsory liquidation is a court-based process under which the assets of a company are released and distributed to the company’s creditors. This process is started by the filing of a petition at court. Once your company has gone into compulsory liquidation you will be banned for 5 years from forming, managing or promoting any business with the same or similar name to your previous company.
What are the consequences of liquidation?
Once your company has been liquidated it will be ‘struck off’ the listings of Companies House. All of your assets will then be used to pay off any outstanding debts, if you have any money left after this it will go to the company shareholders. After your business has gone into liquidation you cannot continue the company at a later date, unless a court order decrees it.
Think a liquidation might benefit your company?
UK businesses have had to contend with setback after setback over the last few years. Global pandemics, cost-of-living-crises, and energy price hikes have all contributed to making operating a business more difficult than it has been for some time.
If you’re concerned that your company will struggle to absorb these and other costs in the future, you need to seek help before it becomes an issue.
We have specialists on hand that can help you to facilitate turnaround strategies, sell your business, or close down your company depending on the best route available to you. Call us on 0800 975 0380, or email advice@forbesburton.com for a free consultation.
Alternatively, you can find out if your company qualifies for liquidation with our online liquidation test.