With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
When a UK company enters liquidation, directors often face urgent questions about what happens to existing leases and contracts. Ongoing rent, supply agreements, and service contracts can have a significant impact on the company’s remaining assets and on creditor outcomes. At this stage, directors must act carefully to protect creditors’ interests and ensure the liquidation process is handled correctly.
Understanding how liquidation affects contractual arrangements is essential. While directors no longer control the company once a liquidator is appointed, their earlier decisions and cooperation remain important. Mishandling contracts or leases before liquidation can create further complications and, in some cases, increase the risk of regulatory scrutiny.
Once a company enters liquidation, control of its assets and affairs passes to the liquidator. Existing contracts and leases do not automatically terminate on liquidation. Instead, they continue unless they end under their own contractual terms, are brought to an end by agreement, or are dealt with through statutory insolvency powers.
Amounts owed under contracts or leases before liquidation are treated as provable debts in the liquidation. Creditors may submit a proof of debt to claim these sums.
If the liquidator decides to continue trading or to use assets or services for the purpose of winding up, liabilities properly incurred in doing so may be treated as expenses of the liquidation, which have priority over ordinary unsecured claims. Whether a particular cost ranks as an expense depends on the statutory rules governing liquidation expenses.
Directors should understand that once insolvency is unavoidable, their duties shift toward protecting creditors as a whole. Failing to recognise contractual liabilities or allowing losses to increase unnecessarily before liquidation can raise concerns under insolvency law, including the risk of allegations such as wrongful trading.
Identifying Onerous Contracts and Leases
The Insolvency Act 1986 allows a liquidator to deal with “onerous property”, which can include certain unprofitable contracts and burdensome leases. These are agreements that provide little or no benefit to the company or expose it to ongoing liabilities.
Common examples include:
Leases with high rent and no prospect of assignment or surrender
Long-term supply contracts that generate ongoing losses
Agreements that impose significant obligations without commercial value
While directors do not exercise the power to disclaim, identifying potentially onerous agreements early helps the liquidator assess the company’s position quickly and limit further losses to the estate.
Disclaimer: Releasing the Company from Burdensome Obligations
A liquidator has a statutory power to disclaim onerous property, including certain leases and unprofitable contracts. Disclaimer allows the liquidator to bring the company’s rights, interests, and liabilities in respect of that property to an end from the date of disclaimer.
The process involves serving a formal notice of disclaimer and is subject to statutory time limits. In general, a liquidator must exercise the power within a defined period after becoming liquidator, although interested parties can apply to court if necessary.
Disclaimer does not extinguish the rights of third parties entirely. Landlords, suppliers, or other affected parties may still submit claims in the liquidation for loss or damage arising from the disclaimer, but these claims are treated as unsecured claims.
Scenario: Disclaiming a Costly Office Lease
Where a company in liquidation holds an office lease it can no longer afford or use, the liquidator may decide to disclaim the lease. This brings the company’s future obligations under the lease to an end from the date of disclaimer.
As a result:
The company is no longer liable for future rent under the lease
The landlord may submit a claim in the liquidation for losses caused by the disclaimer
The landlord’s claim ranks as an unsecured claim
Timely consideration of lease disclaimers can help prevent further losses accruing to the estate and protect the interests of creditors as a whole.
Landlord and Supplier Claims
Landlords and suppliers are entitled to submit claims in a liquidation for amounts owed before liquidation, such as rent arrears, unpaid invoices, or contractual damages.
If a lease or contract is disclaimed:
The company’s future obligations under that agreement end from the date of disclaimer
The counterparty may claim for loss or damage arising from the disclaimer as an unsecured creditor
Where a liquidator continues to use premises or requests continued supply of goods or services for the purposes of the liquidation, liabilities properly incurred may rank as liquidation expenses.
To submit a claim, creditors should:
Gather invoices and records showing amounts owed
Provide copies of relevant contracts or lease terms
Complete and submit a proof of debt to the liquidator
Set-Off and Mutual Dealings: What You Need to Know
In England and Wales, insolvency set-off applies where there have been mutual dealings between the company and a creditor before liquidation. This means that mutual debts are automatically netted off, and only the balance is provable in the liquidation.
For example, if:
A supplier owes the company £10,000, and
The company owes the supplier £15,000
Only the net balance of £5,000 is treated as a claim in the liquidation.
Set-off applies automatically under the insolvency rules and can significantly affect the value of claims and distributions to creditors.
Filing Proofs of Debt: A Quick Overview
Creditors must submit a proof of debt to claim in a liquidation. This applies to landlords, suppliers, customers, and other unsecured creditors.
A proof of debt should include:
The creditor’s name and address
The amount claimed (including VAT where applicable)
The basis of the claim and when it arose
Details of any security held
Supporting documents
When a dividend is proposed, the liquidator will set a formal last date for proving. Claims submitted after that date may not be included in that dividend.
If a proof of debt is rejected in whole or in part, the creditor has a right to challenge the decision through the court process, subject to the applicable procedural rules.
Common Misunderstandings About Contract Endings
A common misconception is that all contracts automatically end on liquidation. In reality, contracts continue unless they end under their own terms, are formally disclaimed, or are otherwise lawfully brought to an end.
Another misunderstanding is that directors have no responsibilities once a liquidator is appointed. Directors must continue to cooperate with the liquidator, provide information, and assist with the winding up of the company.
Directors should also be aware that certain contractual clauses triggered by insolvency may be restricted by statute, particularly in relation to the supply of goods and services, depending on the type of contract and the insolvency procedure involved.
Examples of Real-World Outcomes
Disclaiming a premises lease: The liquidator disclaims an unused office lease, ending future rent obligations and converting the landlord’s losses into an unsecured claim.
Ending unprofitable supply contracts: The liquidator disclaims or otherwise brings an unprofitable contract to an end, stopping ongoing losses to the estate.
Continuing an essential contract: A supply contract is temporarily maintained to allow assets to be realised or work to be completed, with costs treated as liquidation expenses where appropriate.
Each outcome requires balancing the cost to the estate against potential returns for creditors.
FAQs
1. Are directors personally liable for rent or contract payments after liquidation starts?
Directors are not automatically personally liable for company debts after liquidation begins. Personal liability may arise where directors have given personal guarantees or where misconduct occurred before liquidation.
2. How long do landlords have to submit a claim for arrears?
Landlords should submit a proof of debt as soon as possible. When a dividend is declared, the liquidator will set a formal deadline for claims.
3. Can insolvency termination clauses prevent the liquidator from trading?
Certain insolvency-triggered termination clauses, particularly in supply contracts, may be restricted by statute. Whether a clause is enforceable depends on the type of contract and the insolvency procedure.
4. What if a supplier refuses to continue providing goods after liquidation?
Suppliers are generally not required to continue supply unless the liquidator agrees to pay for goods or services as a liquidation expense and statutory restrictions apply.
5. Does disclaimer eliminate all future rent obligations entirely?
Disclaimer ends the company’s future liabilities under the lease from the date of disclaimer, but the landlord may still claim for loss or damage as an unsecured creditor.
6. Can directors negotiate with creditors after a winding-up petition is presented?
Negotiations can continue before a winding-up order is made, but directors should seek professional advice due to the legal risks involved.
7. What happens if my proof of debt is partially accepted?
The liquidator must explain the decision. Creditors may apply to court to challenge it under the insolvency rules.
8. Are personal guarantees wiped out by liquidation?
No. Personal guarantees remain enforceable unless released or satisfied separately.
9. What happens to subtenants if a head lease is disclaimed?
Subtenants may apply to court for a vesting order or negotiate directly with the landlord.
10. Can a director reinstate a disclaimed lease?
No. Once disclaimed, a lease cannot be reinstated by directors. Only the court can grant a vesting order on application by an interested party.
11. Do employment contracts automatically end in liquidation?
Employment contracts do not automatically end but are usually terminated by the liquidator. Employees may be entitled to claim statutory payments through the appropriate government schemes.
12. Can multiple claims be included in one proof of debt?
Yes, provided each claim is clearly itemised and supported by evidence.
13. Will the liquidator notify affected parties about disclaimers?
Yes. Formal notice must be given to parties affected by a disclaimer.
Moving Forward: One Clear Next Step
If your company is approaching liquidation, the most effective first step is to compile a complete list of all leases and contracts. This allows the liquidator to assess liabilities quickly and determine whether disclaimer or continuation is appropriate.
Early engagement with a licensed insolvency practitioner is essential. Professional advice helps ensure statutory duties are met, creditor interests are protected, and unnecessary risks are avoided during the liquidation process.
