Most of what directors believe about insolvency is wrong. The myths are not harmless. They delay decisions, increase personal liability, and lead directors into exactly the situations the Insolvency Act was designed to prevent.
We hear these myths in almost every first consultation. A director who believes liquidation means losing their house will avoid seeking advice until a creditor forces the issue. A director who believes they can dissolve an insolvent company to avoid a formal process creates personal liability that follows them for years. A director who believes wrongful trading means prison mixes up civil and criminal law and panics when they should be planning. Every myth on this page costs directors money, time, and options. We have debunked each one with the law and the practical reality.
Myth 1: “If My Company Is Liquidated, I Will Lose My House”
Reality: Your house is only at risk if you gave a personal guarantee secured against it, if a court makes a wrongful trading contribution order you cannot pay from other assets, or if you are made personally bankrupt as a result. A limited company’s debts are the company’s debts. Limited liability means exactly what it says. We see directors delay liquidation for months because they believe their family home is automatically at risk. In most cases, it is not. In the cases where it is, the risk comes from guarantees the director signed, not from the liquidation itself.
We tell every director who raises this: check your guarantee position first. If you did not guarantee the debt against your property, your house is not at risk from the company’s insolvency. If you did guarantee it, you need personal legal advice on your options, which is a different conversation from the company insolvency advice. See our guide on what happens to directors in liquidation.
Myth 2: “I Can Just Dissolve the Company and Walk Away”
Reality:Dissolution removes the company from the register. It does not extinguish the debts. Creditors can apply to restore the company within six years and pursue their claims. HMRC can object to the strike-off application and block it. If you dissolve an insolvent company to avoid the cost of liquidation, you have not saved money. You have created a deferred liability with compound interest and a creditor who is now angry as well as unpaid.
We have sat with directors who dissolved their company three years ago and received a restoration application from HMRC. The legal costs of defending the restoration exceeded what a CVL would have cost in the first place. The £10 strike-off fee was the most expensive saving they ever made.
Myth 3: “Wrongful Trading Means I Could Go to Prison”
Reality: Wrongful trading under section 214 of the Insolvency Act is a civil claim. You can be ordered to contribute personally to the company’s assets. You cannot be imprisoned. Criminal liability requires fraudulent trading (section 213) — carrying on business with intent to defraud creditors — which is a different offence with a different and much higher evidential threshold.
We make this distinction clearly because the confusion between wrongful trading and fraudulent trading causes unnecessary panic. Most directors who face personal consequences face civil claims and disqualification, not criminal prosecution. Criminal cases involve deliberate dishonesty, not poor business judgement. If you traded too long through optimism rather than fraud, your exposure is financial, not criminal.
Myth 4: “The Liquidator Works for Me”
Reality: The liquidator works for the creditors. In a CVL, you nominate the liquidator, but once appointed, their duty runs to the creditor body, not to you. In a compulsory liquidation, the Official Receiver is appointed by the court and has a statutory duty to investigate your conduct. The liquidator is not your adviser, your advocate, or your ally. They are an officer whose job is to maximise creditor recoveries and report on whether your conduct was fit.
We see directors who assume the IP they appointed will look out for their interests. The IP will be professional and fair, but their loyalty is to the creditors. If you need someone looking out for your personal interests, you need a solicitor.
Myth 5: “If I Resign as Director, I Avoid the Investigation”
Reality:Resignation does not remove liability for decisions made while you were in office. The liquidator investigates every person who was a director during the relevant period, whether they are still on the board or not. The Insolvency Service can seek disqualification against former directors. Your personal guarantees survive resignation. Your overdrawn loan account survives resignation. The only thing resignation ends is your authority to act — not your accountability for what you already did.
Myth 6: “HMRC Is Just Another Unsecured Creditor”
Reality: Since December 2020, HMRC has secondary preferential creditor status for PAYE, employee NICs, VAT, CIS deductions, and student loan repayments. These taxes — the ones you collected on behalf of HMRC — rank ahead of floating charge holders and all unsecured creditors. Corporation Tax and employer NICs remain unsecured, but the preferential portion can be substantial. We see directors who treated HMRC as a low-priority creditor discover during liquidation that HMRC’s preferential claim consumed most of the available assets. See creditor priority in liquidation.
Myth 7: “I Cannot Afford to Liquidate, So I Will Just Stop Trading”
Reality: Simply stopping trading without a formal insolvency process does not end the company’s obligations. Creditors can still pursue their claims. HMRC can still petition to wind up the company. The Insolvency Service can still investigate your conduct. Doing nothing is the worst option because it leaves the company in a legal limbo where debts accumulate, creditors escalate, and your conduct during the drift period is examined in any subsequent investigation.
A CVL typically costs from £5,000, paid from the company’s assets. If the company has no assets, some IPs will still accept the appointment. If you genuinely cannot fund a CVL, a creditor may petition for compulsory liquidation, which costs you nothing directly but removes all your control. Either way, formal process is better than no process.
Myth 8: “Insolvency Means I Can Never Be a Director Again”
Reality: Being a director of a company that enters insolvency does not automatically disqualify you. Disqualification is a separate process that depends on your conduct, not on the insolvency itself. If you acted responsibly — sought advice, kept records, cooperated with the liquidator — there is no reason you cannot be a director of another company. Disqualification only follows if the Insolvency Service concludes your conduct was unfit and obtains an order or undertaking.
We have helped directors close one company through a CVL on a Tuesday and incorporate a new company on a Wednesday. The key is that the new company must not trade under a prohibited name (section 216), and the director must not be subject to a disqualification order.
The One Truth That Replaces All the Myths
Every myth on this page has the same root cause: directors who did not seek professional advice early enough. If you take one thing from this page, let it be this: a single conversation with a licensed insolvency practitioner will replace every myth with the specific legal reality that applies to your company. The conversation is free, confidential, and almost always less frightening than whatever you have been imagining at 2am.
Company Debt connects directors with regulated practitioners who deal with these myths every day. Make the call. The truth is almost always more manageable than the fear.
How We Wrote This Article
This article was written by the Company Debt editorial team based on the Insolvency Act 1986, the Company Directors Disqualification Act 1986, the Finance Act 2020 (HMRC preferential status), and the most common misconceptions identified through consultations with licensed insolvency practitioners in our network. The article was reviewed by Chris Andersen, a licensed insolvency practitioner regulated by the IPA.
Company Debt is a commercial service that connects business owners with insolvency professionals. We may receive a fee when you engage a practitioner through our service. This does not influence our editorial content or recommendations.
FAQs About Common Insolvency Myths
Is it true that all directors are investigated during liquidation?
In compulsory liquidation, the Official Receiver must investigate every director. In a CVL, the liquidator investigates conduct and files a report, but the depth of investigation depends on what they find. If your records are clean and your conduct reasonable, the investigation in a CVL is typically proportionate. The investigation itself is not a punishment — it is a statutory requirement.
Can I start a new company immediately after liquidation?
Yes, unless you are subject to a disqualification order. You must comply with section 216 of the Insolvency Act, which restricts the use of the old company’s name or a similar name for five years. If you plan to carry on in the same industry with different branding, there is no restriction on forming a new company.
Does liquidation wipe out all the company’s debts?
The company’s unsecured debts that are not paid from the liquidation proceeds are extinguished when the company is dissolved. But personal guarantees, overdrawn director’s loan accounts, HMRC personal liability notices, and wrongful trading contribution orders survive dissolution and are enforceable against you personally. See what happens after liquidation.
