Liquidation and Bankruptcy are often mentioned together as they’re both insolvency options. But they’re not the same thing. Liquidation is only an option for a limited company that can’t pay its debts. Bankruptcy is an insolvency solution that only applies to you personally, if you can’t repay what you owe. If you’re a business owner in financial difficulty, it’s essential to understand which one affects you, and when.
What is Liquidation?
Liquidation is a company insolvency process. It means formally shutting down a limited company that can’t pay its debts, with any assets sold off to repay creditors. The company is then removed from the Companies House register.
There are two main types of Liquidation that are relevant to struggling businesses:
- Creditors’ Voluntary Liquidation (CVL) – initiated by directors when the company is insolvent. It’s a proactive way to deal with unmanageable debt and avoid further legal trouble.
- Compulsory Liquidation – initiated by creditors (often HMRC) through a court process if the company doesn’t respond to demands.
Once a company is liquidated, any unsecured debts, like supplier invoices or outstanding debts are written off, provided there’s been no wrongdoing. An unpaid Bounce Back Loan can be written off too, in the right circumstances. Talk to our experts about how we can help you clear company debts with Liquidation.
What is Bankruptcy?
Bankruptcy is a personal insolvency process. It applies to individuals, not companies, who can’t pay their debts. If you’re a sole trader, or if you’ve given personal guarantees for company borrowing, bankruptcy could be an option to deal with your situation in a controlled way.
A licensed insolvency practitioner will look at your assets and see what can be used to repay what you owe. Bankruptcy typically lasts 12 months, though the effects (like credit rating damage and asset restrictions) can last longer.
We offer Bankruptcy help too, whether you’re an individual, or business owner or company director struggling with company debt or HMRC enforcement.
Company debt vs personal debt
This is one of the first questions we’ll help you work through. Many directors think they’re personally liable for company debt. But in most cases, they’re not.
Your company debts could only become personal debts if you:
- signed a personal guarantee on a business loan or lease
- took a Bounce Back Loan and used it for personal expenses
- carried on trading while insolvent
- owe tax personally, because of misconduct or a Personal Liability Notice (PLN) from HMRC
If none of the above apply, Liquidation can be a safe and strategic option to closing your company.
If you’re able to settle any company debt that you’re personally liable for, without Bankruptcy, then that option should be available to you. Bankruptcy should only be on the table if you genuinely can’t meet personal liabilities.
What happens to HMRC debt?
Tax debt complicates things, especially when HMRC is involved. In a CVL, HMRC is treated like any other creditor. PAYE, VAT and Corporation Tax debts are included in the process, and you won’t be held personally liable for HMRC debt, unless you’ve mishandled funds or acted fraudulently.
In Bankruptcy, HMRC debts are included too. But if they think you’ve tried to avoid tax or used the company as a shield, they could still hold you personally liable for paying back the funds. The earlier you act, the easier it is to avoid these escalations.
Is What if I’ve already received legal threats?
If you’ve had a statutory demand, a winding-up petition or a letter from HMRC warning you personally, don’t delay. These are red flags that action is imminent.
- For company debt, you could still initiate a Liquidation and take control before the court forces it.
- If it’s personal, you could explore options like an IVA (Individual Voluntary Arrangement) or, if there’s no other route, Bankruptcy.
We help people in exactly this situation, every day. You don’t need to untangle it alone. Call our experts for free, confidential advice.
Will Liquidation or Bankruptcy affect me more?
Liquidation will protect you from leaving any loose ends when you close your company, and can write-off any unpaid company debts, if you’ve followed the duties of a director and haven’t signed guarantees.
Bankruptcy carries more personal consequences, including losing control of your assets and future borrowing ability. If you’re unsure which path you’re heading towards, we’ll help you work it out. The earlier you act, the more choices you’ll have.
Can I liquidate the company and start again?
Yes, in many cases, that’s exactly what our clients do. It’s commonly referred to as ‘phoenixing’ and is fully legal when done correctly. There are rules around starting a new company with the same name or trading style, but with expert guidance, you can close the company, wipe the debts, and launch again — without carrying legacy problems into your next venture.
Still unsure on Liquidation vs Bankruptcy?
We get it. These terms can be confusing, especially when the stress is piling up and you just want a way out. That’s where we come in.
Whether you’re facing business closure, personal financial risk or creditor action from HMRC, we’ll give you straight-talking advice on the smartest next step. No jargon. No judgement. Just a clear, practical plan to protect you and help you move forward.
Get in touch today for free, confidential advice from our insolvency and liquidation experts. Whether it’s Liquidation, Bankruptcy or something in between, we’ve got your back.
