Leases and Contracts in Liquidation: What Happens to Agreements When a Company Winds Up

You have signed a five-year commercial lease, three supplier contracts with rolling terms, two equipment finance agreements, and an employment roster that runs to fourteen people. Now the company cannot pay its debts and liquidation looks unavoidable. The first question most directors ask is not about the process itself. It is about what happens to all those agreements they are still bound by.

The answer is less tidy than you might hope. Some contracts end automatically when a liquidator is appointed. Others survive, and the liquidator decides whether to honour them or walk away.

A few obligations, particularly personal guarantees on commercial leases, follow you personally after the company ceases to exist. Understanding which category each agreement falls into is the difference between preparing properly and being caught out by a landlord’s claim six months after the company has been struck off.

Our team deals with directors in this position every week. The concern is always the same: will I still be on the hook? This guide works through each type of agreement, explains what the liquidator can and cannot do, and flags the personal exposures that catch directors off guard.

Quick Answer on Leases and Contracts in Liquidation

When a company enters liquidation, its contracts do not all vanish overnight. The liquidator (the licensed insolvency practitioner appointed to wind up the company) has the legal power to disclaim onerous contracts, which means formally abandoning them so the company is no longer bound.

Contracts that are disclaimed stop being enforceable against the company, but the other party can submit a claim as an unsecured creditor for any loss they suffer.

Personal guarantees are a separate matter entirely: if you have personally guaranteed a lease or loan, that guarantee survives the liquidation and the creditor can pursue you directly.

What Happens to Contracts When Liquidation Begins

In our experience, a common misunderstanding is that liquidation cancels every contract the company has entered into. It does not. What actually happens depends on the type of liquidation and the terms of each individual agreement.

In a creditors’ voluntary liquidation (CVL), which is the most common route for insolvent companies, the directors pass a resolution to wind up and a licensed insolvency practitioner is appointed as liquidator.

At that point, the company still exists as a legal entity. Its contracts remain in force until the liquidator takes specific action to deal with them.

Many commercial contracts contain what is called an insolvency termination clause (sometimes called an ipso facto clause). This is a provision that allows the other party to terminate the contract if the company enters an insolvency procedure.

Where such a clause exists, the supplier, landlord, or counterparty can choose to end the agreement immediately. Not all contracts include one, however, and even where they do, the other party is not obliged to act on it.

From what we see across our caseload, the practical result is a mixed picture. Some agreements fall away quickly because the other side terminates. Others continue running, racking up liabilities, until the liquidator steps in.

The Liquidator’s Power to Disclaim Contracts

Under section 178 of the Insolvency Act 1986, a liquidator has the power to disclaim onerous property. In plain terms, this means the liquidator can formally reject any contract, lease, or obligation that is unprofitable or burdensome to the company.

Disclaiming is not the same as breaking a contract. When a liquidator disclaims, the company is released from all future obligations under that agreement. The other party (the landlord, supplier, or whoever) cannot force the company to continue performing.

Instead, they acquire the right to submit a claim in the liquidation for any financial loss caused by the disclaimer. That claim ranks as unsecured, which in most insolvency cases means they will receive a fraction of what they are owed, if anything at all.

The liquidator can disclaim at any time, but there is an important caveat. If a person with an interest in the property (the landlord, for example) serves a written notice requiring the liquidator to decide, the liquidator has 28 days to disclaim or lose the right to do so. This mechanism exists to stop liquidations from dragging on while counterparties are left in limbo.

In our experience, missing this 28-day window is one of the more painful procedural mistakes a liquidator can make: the estate then carries the full remaining obligation under that contract, which can wipe out the dividend prospects for unsecured creditors entirely.

Commercial Leases: The Biggest Headache

For most directors our team speaks to, the commercial lease is the agreement that causes the most anxiety, and with good reason. Picture this: you signed a ten-year lease on a warehouse four years ago. The rent is £3,500 a month and there are seven years left to run.

The company is insolvent and you need to liquidate. That is potentially £294,000 of future rent that somebody has to account for.

In liquidation, the liquidator will almost always disclaim a commercial lease because the company has no use for the premises and the ongoing rent is an obvious burden on the estate. Once disclaimed, the lease is treated as ended. The company owes no further rent. The landlord gets the property back and can re-let it.

But here is where it gets difficult. The landlord can submit a claim in the liquidation for the loss caused by the early termination.

That claim will include any unpaid rent up to the date of disclaimer, dilapidations (the cost of restoring the property to the condition required by the lease), and potentially a claim for future rent loss, though this is often reduced by the court to reflect the landlord’s obligation to mitigate their loss by finding a new tenant.

The landlord’s claim ranks as unsecured. In a typical insolvent liquidation, unsecured creditors receive very little. From the company’s perspective, the lease liability is dealt with. From your personal perspective, there is a further question, covered below, about guarantees.

Supplier Contracts in Liquidation

Supplier contracts are usually more manageable than leases, but they can still create problems in the gap between the decision to liquidate and the liquidator’s appointment.

Consider a common scenario: you have a monthly standing order for raw materials. You know the company is heading for liquidation, but the formal process takes a few weeks to arrange. During that period, the supplier continues to deliver goods.

Those deliveries create fresh liabilities. If the company accepts goods it knows it cannot pay for, directors can face scrutiny for wrongful trading.

Once the liquidator is appointed, they will review all supplier contracts. Contracts that are still executory (meaning both sides still have obligations to perform) can be disclaimed. Contracts that have already been fully performed by the supplier but not paid for are simply debts owed by the company, and the supplier joins the queue of unsecured creditors.

We often see suppliers who have retention of title clauses in their terms. This means they retain ownership of goods until they are paid for. If those goods are still identifiable and unused, the supplier can reclaim them from the liquidator. In our experience, this is often contested, especially where raw materials have been incorporated into finished products.

Employment Contracts in Liquidation

Employment contracts are treated differently from commercial agreements. When a company enters liquidation, employees are typically dismissed by the liquidator. The dismissal is treated as a redundancy, and employees become creditors of the company for any outstanding wages, holiday pay, notice pay, and redundancy pay.

The good news, and we make sure directors understand this, is that most of these claims are preferential debts (meaning they are paid ahead of ordinary unsecured creditors) up to certain statutory limits.

Beyond those limits, employees can claim from the National Insurance Fund via the Redundancy Payments Service, which covers statutory redundancy pay, unpaid wages (up to eight weeks), holiday pay (up to six weeks), and notice pay (up to twelve weeks).

For a more detailed breakdown of how employees are affected, see our guide on what happens to employees during liquidation.

As a director, your main responsibility here is to cooperate with the liquidator in providing employee records and to avoid making promises about payments that the company cannot honour.

Hire Purchase and Finance Agreements in Liquidation

If the company has vehicles, machinery, or equipment on hire purchase (HP) or a finance lease, the position depends on who owns the asset.

Under a hire purchase agreement, the finance company owns the asset until all payments have been made. If the company enters liquidation before the HP is paid off, the finance company will repossess the asset.

The van you have been paying off for two years gets collected from the yard, and that is the end of it. There is no scope for the liquidator to keep it unless they can negotiate a buy-out, which rarely happens in an insolvent winding up.

Finance leases work similarly. The asset belongs to the finance provider, and they will reclaim it. Operating leases (where the company was essentially renting the equipment) are treated like any other contract and can be disclaimed by the liquidator.

For a fuller picture of how company assets are dealt with, our guide to company vehicles and equipment in liquidation covers the main scenarios.

Personal Guarantees on Leases and Contracts

From our caseload, this is the section that matters most to many directors reading this page, and the one that delivers the worst news.

A personal guarantee (PG) is a legally binding promise you made as an individual, not as a director, to cover the company’s obligations if it fails to pay. Landlords routinely require personal guarantees from directors of small companies, and so do some lenders and suppliers.

A personal guarantee survives the company’s liquidation. The company may be dissolved, the lease may be disclaimed, and the liquidation may be complete. None of that releases you from your personal guarantee. The landlord can pursue you personally for rent arrears, future rent losses, and dilapidations, subject to the terms of the guarantee itself.

In our experience, the scope of your liability depends on the wording of the guarantee. Some guarantees cover only rent. Others cover all obligations under the lease, including repair costs and service charges. A few are capped at a fixed amount.

You need to read the actual document, and if the sums involved are significant, you should take legal advice before the liquidation begins.

We regularly sit down with directors who assumed the guarantee would fall away when the company closed. It does not. If you have signed a PG on a lease with years left to run, that exposure is real and needs to be factored into your planning.

What Landlords and Suppliers Can Claim

When a contract is disclaimed or terminated because of the liquidation, the other party does not simply absorb the loss without recourse. They are entitled to submit a proof of debt (a formal claim) in the liquidation for the financial loss they have suffered.

For landlords, this typically includes:

• Unpaid rent up to the date of disclaimer.
• Dilapidations (the estimated cost of returning the premises to the required standard).
• A claim for loss of bargain (the remaining rent under the lease, discounted to reflect the landlord’s duty to mitigate by re-letting).

For suppliers, the claim is usually simpler: the value of goods delivered but not paid for, less any retention of title goods they have managed to recover.

All of these claims rank as unsecured. They sit behind the liquidator’s fees and expenses, any secured creditors, preferential creditors (mainly employees), and any prescribed part (a portion of floating charge realisations set aside for unsecured creditors).

In most insolvent liquidations, the dividend to unsecured creditors is low. Understanding the costs of liquidation helps explain why so little tends to reach the bottom of the queue.

How to Prepare for Leases and Contracts Before Liquidation

If you know liquidation is likely, there are practical steps you can take to reduce the fallout from existing contracts. We walk directors through these in the order we recommend tackling them.

1. Audit every agreement: gather your lease, HP agreements, supplier contracts, and finance documentation, and identify which contain personal guarantees.
2. Stop taking on new obligations: once the company is insolvent, do not enter new contracts or accept deliveries you cannot pay for.
3. Negotiate early where possible: approach landlords about a lease surrender before liquidation begins; this may reduce personal guarantee exposure.
4. Notify finance companies: voluntary return of HP or leased assets is smoother and less costly than a contested repossession.
5. Take specific legal advice on any personal guarantees before the liquidation is initiated; scope and enforceability vary, and options narrow once formal insolvency starts.

Speak to a licensed insolvency practitioner early. The earlier you engage with the process, the more options you have. A formal liquidation is not the only route, and in some cases a restructuring option may preserve more value for everyone involved.

FAQs on Leases and Contracts in Liquidation