Liquidation is a commonly used term in business law, finance and economics.

We cover the meaning, the types, process, timeframes and potential costs below.

Liquidation: Definition

The term ‘liquidation’ refers to the formal insolvency procedure, in which a company is brought to a close by an appointed licensed insolvency practitioner (Liquidator or IP).

Liquidation means the company’s assets are sold (liquidated) and any realisation of revenue is redistributed in order of priority amongst creditors and shareholders.

The liquidator then strikes the company off the registrar (this is known as dissolution ), the final stage of the liquidation process.

The laws surrounding liquidation in the UK are primarily defined by the Insolvency Act 1986, as opposed to US Bankruptcy Code, Chapter 7, which governs proceedings in the US.

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Entering Liquidation and the Options

If you’re a company director who wishes to shut down their business (also called winding up ), or is being forced into that situation by creditors, then you’ll need to understand your options.

Entering company liquidation means your company will cease to trade, your staff will be made redundant, and the company itself will cease to exist as a legal entity.

As a director, your powers will cease, and you’ll no longer be able to access business bank accounts.

If you’re insolvent, a licensed insolvency practitioner will organise the liquidation of corporate assets, and the proceeds are then distributed to the company’s claimants to repay debts. In the UK, claimants are referred to as creditors.

Finally, the company will be struck off the register at Companies House. The company will no longer exist.


The liquidation of a company can be done in three different ways.

There are two voluntary liquidation procedures and one compulsory liquidation procedure. All require the assistance of a liquidator.

The voluntary liquidation procedures, Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL) are initiated by the shareholders and directors.

The compulsory procedure is usually initiated by creditors like HMRC via a court order.

Read more on all three types below.

Voluntary Liquidation

1. A Creditors’ Voluntary Liquidation (CVL) used by insolvent companies and is initiated by a shareholders’ resolution.

This involves the dissolution of the insolvent company and the redistribution of any assets to the creditors. This procedure enables directors to write off unsecured business debts that are not personally guaranteed.

Directors may see insolvent liquidation as an exit from financial difficulty; whilst addressing all of the creditors, appropriately.

2. A Members’ Voluntary Liquidation (MVL) is the appropriate way to liquidate a solvent UK company and can be used as part of an exit strategy.

A solvent liquidation may be considered if you have a company that you want to close as part of your business plan and reduce taxation. MVL’s allow you to pay less capital gains tax (at 10% on all qualifying assets)

Your company may have outlived its purpose and be heading towards a natural end of trading, or you may wish to extract the value of cash and assets from the company in a tax efficient manner.

For an MVL, the directors must sign a declaration stating that there are no remaining creditors. One example of a creditor could be tax arrears with HMRC for VAT or PAYE, so this need to be considered before going into liquidation.

The insolvency practitioners will realise business assets at fair value, before dissolving it.

Compulsory Liquidation

Compulsory liquidations are usually initiated by a creditor that is looking to force a business that cannot pay its debts into closure via a court order application due to non payment of debt. Most commonly, this is HM Revenue & Customs (HMRC), however, it can be initiated by any creditor owed more than £750.

In the UK, the Limitation Act 1980 allows up to six years for a creditor to commence legal action to recover a business debt in England and Wales.

The compulsory process is usually instigated with a winding up petition (the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 (SI 2016/1024). Once it is heard at court, it can become a winding up order.

This procedure is often used to wind up your business as a last resort by creditors after failed negotiations over missed payments.

This insolvency procedure is usually handled by the Official Receiver or appointed liquidator. Therefore, this is not a voluntary process for directors.

The conduct of the directors is reported back to the UK Secretary of State at the end of the liquidation proceedings and failure to cooperate with the Official Receiver can have serious repercussions.

If you cannot pay the creditor and do not act immediately the situation can escalate quickly.

Liquidation Process

The Liquidation process is as follows:

  1. An Insolvency Practitioner is appointed as Liquidator.
  2. Directors’ powers cease and the IP takes over the management of the company’s affairs.
  3. The company’s assets are then assessed and realised (liquidated).
  4. If there are any creditors they are then paid in order of priority.
  5. Surplus cash is distributed to the shareholders.
  6. The company is finally dissolved and struck-off the registrar of companies (Companies House).


There is no set time-frame to liquidate a company and with several variables dependent on each case, timeframes will vary widely.

However, once engaged, the liquidators will act immediately and the business can be placed into liquidation within a two-to-three week period if sufficient information is provided.

The complete liquidation process itself can take around one year on average, but longer when a larger company is involved.

For a compulsory liquidation, the timeframe between the initial winding up petition and the end-of-court proceedings is typically three months.

Priority of Claims

Who gets paid first in a liquidation? This is decided by what is called the ‘priority of claims.’

You can read more about who gets paid and in what order , including how employees are addressed.

Briefly, the order is as follows:

  • Any secured creditor (often banks, these lenders will seize the collateral and sell it)
  • Expenses incurred by the insolvent estate
  • The insolvency practitioners
  • Preferential creditors (which include employees and now HMRC)
  • Unsecured creditors
  • Shareholders

Do Employees Get Paid?

What does liquidation mean for a company employee? And do they get paid?

This is a commonly asked question which we cover in more detail here .

Employee wages, wage arrears, holiday pay and notice pay are all covered up to certain statutory limits by the Redundancy Payments Office of the Department of Trade and Industry.

What Happens to the Directors?

The most important thing for directors to realise when liquidating a company is that their responsibilities undergo a marked shift if the business becomes insolvent.

Once insolvent, the company’s directors must prove they have acted in the best interests of the creditors. To avoid the risk of personal liability, it is important that directors act responsibly and take professional advice, immediately.

Directors should be aware of the fact that once an Insolvency Practitioner is appointed, they will have a responsibility to investigate the actions of company directors during the period preceding the liquidation.

Principally, the liquidator looks for clarification that, as soon as the director became aware of the situation he/she put the interests of creditors first. Where this is not the case, the director becomes open to charges of wrongful or fraudulent trading .

In cases where this can be proven, the director may become personally liable for some or all of the company debts .

Can I Liquidate a Company Myself?

The short answer is no, you cannot liquidate a company yourself.

All company liquidations requires the services of a liquidator, under UK law.

Dissolution is not an option either, since striking-off a business with debt is against the law.

The laws on this are intended to ensure a fair process. Using an IP ensures that the company’s assets are valued correctly, and creditors are treated equitably. It is also intended to examine whether directors have acted responsibly or engaged in wrongful trading .

Many directors, rightly concerned about costs when money is scarce, fear they will not be able to pay for the process. Fortunately, almost all liquidations can be paid for via the realisation of company assets.

Directors should also be aware they may be eligible for directors redundancy payments .

Do contact one of our team for a confidential discussion on how your company liquidation might be funded if this is an area of concern.

The Role of a Liquidator

An appointed and licensed liquidator (IP) is required for liquidation and they have several duties in their position.

These are experienced professionals have the responsibility to act as an impartial, third-party to oversee the process from beginning to end, after their appointment.

The role of a liquidator encompasses various responsibilities which include, but are not limited to:

  • Creating a Statement of Affairs document for the creditors, with the assistance of directors. This is a financial statement explaining the business’ position in some detail
  • Distributing the realised assets and surplus funds to the appropriate parties
  • Determine any outstanding claims against the business and satisfy those claims in order of priority that is set by law

Difference between Winding up, Liquidation & Bankruptcy

Liquidation and ‘winding-up’ are often used in the same context. Both of these terms refer to liquidating a company; either because the business has cash-flow problems, or because there are cash and assets, such as property, that the directors and shareholders would like to extract.

Sometimes people mistakenly refer to the phrase “company bankruptcy”. Bankruptcy is only relevant when addressing an individual, partner, or sole trader and not a limited company.

Costs & Fees of Liquidation

The average liquidation of a small business in the UK costs around £4,000 to £6,000 + VAT, however, this can vary dependent on a number of variables such as the size of the company and volume of creditors.

Free, Confidential Liquidation Advice
For free confidential advice on liquidating a private company and help with your current situation, please call one of our advisors on 08000 746 757 and enquire about our services. You can arrange a call back via our contact page at a convenient time, or book a 100% confidential meeting via the website.