Liquidation is a formal process used to close a limited company. It can be used in cases of insolvency when a failing company can’t pay its debts on time or in full. Or when directors want to close a cash-rich solvent company and extract the profits in a tax-efficient way.
Whatever the circumstances, liquidation follows a strict legal framework. A licensed insolvency practitioner takes control, deals with creditors, sells assets and ensures the company is closed properly. For directors, it provides certainty and brings immediate structure to what is usually a stressful period.
How liquidation starts
Liquidation usually begins in one of three ways. Each route has a different legal trigger and a different starting point, depending on whether the company is solvent or insolvent.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation begins when the company’s directors identify insolvency and can’t continue trading safely. The first steps are:
- The directors formally acknowledge insolvency, usually after failing the cash-flow or balance-sheet tests
- Trading stops to avoid wrongful trading
- A licensed insolvency practitioner is contacted to confirm the financial position
From that moment, the practitioner prepares the necessary paperwork, notifies creditors and arranges the Meeting of Creditors (which can be held virtually), where they are formally appointed as Liquidator. They then take control of the company and begin the liquidation process.
This route is proactive and gives directors more control over timing than waiting for creditor enforcement.
Compulsory Liquidation
Compulsory Liquidation is usually initiated by unpaid creditors, rather than the directors. It starts when:
- A creditor (often HMRC) files a winding-up petition with the court
- The petition is advertised in the Gazette
- If the court grants the order, the company is immediately placed into liquidation
- The Official Receiver takes control from the moment of the order
Once Compulsory Liquidation begins, directors lose all control over the process and cannot choose their liquidator.
Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation is only available when the company is solvent and cash-rich. When there’s between £25,000 and £1m in retained profits, Business Asset Distribution Relief (BADR) could make an MVL the most tax-efficient way to close qualifying companies.
An MVL starts with:
- Directors preparing a statutory declaration of solvency, confirming all debts can be paid in full within 12 months of the liquidation beginning
- The declaration is sworn before a solicitor or notary
- Shareholders pass a special resolution to wind the company up
- A licensed insolvency practitioner is appointed as liquidator
Because the company is solvent, the timeline is faster and no creditor meeting is required.
What happens in a liquidation?
The steps taken in a liquidation are mostly the same across CVL, MVL and Compulsory Liquidation. The biggest differences are:
- In a CVL and Compulsory Liquidation, the insolvency practitioner involved is legally obliged to carry out a director conduct report
- In an MVL, all creditors are paid in full and shareholders are able to take surplus profits
Step 1: Preparing the financial information
Directors provide the insolvency practitioner with company records including:
- Bank statements
- Full and up-to-date accounts
- Creditor schedules
- Tax balances
- Accurate details of any assets
This allows the insolvency practitioner to form a clear and accurate picture of the company’s financial position.
Step 2: Directors’ resolution
In a CVL or MVL, directors sign a resolution to place the company into liquidation and call a shareholder meeting. At that meeting shareholders pass a special resolution to wind up the company and appoint the liquidator.
In a Compulsory Liquidation there is no board resolution. The process begins automatically once the court issues the winding-up order.
Step 3: Creditors are notified
All creditors must be formally notified. In a CVL or Compulsory Liquidation, they are asked to attend a Meeting of Creditors, where the insolvency practitioner is officially appointed as Liquidator.
Once this is completed, the creditors submit their claims so the liquidator can agree or reject them. This creates transparency and ensures creditors are treated fairly under insolvency law.
In a Members’ Voluntary Liquidation, the position is different. The company is solvent and all creditors must be paid in full and in a set timeframe, so there’s no need for them to compete for the limited funds.
Step 4: The liquidator takes control
Once appointed, the liquidator:
- Takes legal control of the company
- Closes bank accounts
- Secures physical and digital assets
- Handles all communication with creditors
- Reviews the company’s affairs
- Completes statutory filings
Step 5: Realising company assets
Assets are valued and sold. These may include:
- Stock or equipment
- Vehicles
- Intellectual property
- Contracts or leaseholds
- The company trading name
Funds raised contribute to the pool available for creditors. In some cases, directors may buy assets, but this must be at fair market value and through a transparent process.
Step 6: Distributing funds to creditors
Liquidators follow a strict statutory order of priority, set out in the UK’s liquidation regulations. Payments follow this sequence:
- Secured creditors (fixed charge holders)
- Costs of the insolvency
- Preferential creditors (for example, certain employee claims)
- Secured creditors with floating charges
- Unsecured creditors
- Shareholders
Step 7: Director conduct report
Every liquidator in an insolvent liquidation (CVL or Compulsory Liquidation) must submit a confidential report to the Insolvency Service reviewing the actions of directors before insolvency.
This happens in every case and doesn’t mean the director is suspected of wrongdoing. Most reports close with no further action. Issues arise only if there is evidence of misconduct such as fraudulent trading, misuse of funds, or continuing to trade irresponsibly.
Step 8: Dissolving the company
When all assets are realised, distributions complete and statutory steps are finished, the company is dissolved and removed from the Companies House register. The business no longer exists and all unsecured debts are written off unless misconduct is found.
What liquidation means for directors
For many directors liquidation is a relief because creditor contact stops and the process removes uncertainty. It can also be the safest route when a company is insolvent because it guarantees that the company will be closed properly, with no loose ends like forgotten creditors that could cause issues down the line.
Unless there is misconduct, misfeasance, a personal guarantee or an outstanding director’s loan account, limited liability also applies, which means that you’re not held personally responsible for company debts. And you can usually act as a director again immediately, unless you’re disqualified because of proven misconduct.
What liquidation costs
Liquidation is a regulated professional process and cannot be completed for free. Costs vary depending on the size of the company, the number of creditors and the amount of work required.
Fees are paid from company assets wherever possible. If there are no assets, directors may be asked to contribute. However, No-Asset Liquidation routes exist for companies that genuinely cannot afford to proceed.
Key takeaways for how does liquidation work?
- Liquidation is a structured, regulated process that protects creditors and directors
- Once insolvency is identified, acting early gives you more control and reduces personal risk
- A licensed insolvency practitioner handles every part of the process, from asset sales to creditor communication
- Most directors face no personal repercussions and feel a sense of relief once the process starts
- Alternatives like CVAs or administration may be available if the business has a realistic chance of recovery
Get advice on how liquidation works
If your company is facing creditor pressure, missed tax payments or cash-flow problems – or you simply want to extract your profits in the most tax-efficient way – understanding how liquidation works is the first step towards regaining control.
A short conversation with one of our qualified insolvency practitioner can clarify your options and outline the safest route forward.
Get in touch today for free, confidential advice before the situation escalates.
