When a company can no longer pay its debts on time or in full, liquidation can be a responsible way to close down and draw a line under unmanageable liabilities. But because it’s a legal process there are strict liquidation regulations that directors must follow.
If you’re considering liquidation, understanding these rules will help you stay compliant, protect yourself personally and ensure the process runs as smoothly as possible.
What liquidation means
Liquidation is the formal process of closing a company, selling its assets (known as “realising assets”), and using the proceeds to repay creditors. After liquidation, the company is dissolved and ceases to exist.
There are several types of liquidation in UK law:
Creditors’ Voluntary Liquidation (CVL) – used when a company is insolvent, and directors take the initiative to close it down in an orderly way.
Compulsory Liquidation – forced by the court, usually after a creditor (often HMRC) issues a winding-up petition.
Members’ Voluntary Liquidation (MVL) – for solvent companies that can pay all debts in full, often used for tax-efficient closure.
Each process is governed by the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016, which set out the legal framework for how liquidation must be conducted.
Why liquidation regulations matter
Liquidation isn’t just administrative. It’s a regulated legal procedure. The rules exist to make sure:
Creditors are treated fairly: All creditors need to be notified and repaid their debts according to priority.
Directors fulfil their legal duties: They must act in the best interests of creditors once insolvency is clear.
The process is transparent: There is a full investigation of company affairs and director conduct.
The company is properly dissolved: This minimises the risk of later claims or penalties.
Failure to follow these regulations can expose directors to being held personally liable for company debts, fines, or even director’s disqualification.
The key regulations directors must follow
1. Only a licensed insolvency practitioner can act as Liquidator
UK law requires that a licensed insolvency practitioner manages the liquidation process. They’re responsible for:
- Taking control of the company
- Selling assets and distributing funds
- Notifying creditors and statutory bodies
- Filing reports with the Insolvency Service and Companies House
Acting without a licensed insolvency practitioner, or trying to “DIY” liquidation, is unlawful.
2. Directors must stop trading when insolvent
Once you know your company can’t pay its debts in full and as they fall due, you have a duty to act in the best interests of creditors. Continuing to trade when there’s no reasonable chance of avoiding insolvency can lead to wrongful trading claims under the Insolvency Act.
That means you could be ordered by the court to contribute personally to company debts. Early professional advice is your best defence.
3. Directors must cooperate with the liquidator
Regulations require directors to provide full information and assistance to the appointed liquidator, including:
- Up-to-date company records and accounts
- Details of assets, liabilities, and transactions
- Access to premises, stock, or data
- Explanations for any unusual payments or missing assets
Failure to cooperate can delay the process and, in serious cases, lead to legal action.
4. Director conduct will be investigated
Under liquidation regulations, every insolvency practitioner must file a Director Conduct Report to the Insolvency Service.
This report covers how the company was managed, whether directors met their duties, and whether there’s any evidence of:
- Misuse of company funds
- Preferential treatment to certain creditors
- Unlawful dividends or drawings
- Fraudulent or wrongful trading
If misconduct is found, you could face personal liability or director disqualification for up to 15 years. Acting responsibly and seeking advice early helps demonstrate that you’ve behaved properly.
5. Asset sales must be transparent and fair
Liquidators are bound by regulation to achieve best value for assets. Any sale, whether to a third party or to existing directors, must be independently valued and properly documented.
If assets are sold below market value, the transaction can be reversed, and directors could face claims for “transactions at undervalue”.
6. The correct order of creditor repayment must be followed
Liquidation rules are clear about who gets paid, and in what order:
- Secured creditors with fixed charges (e.g. banks)
- Insolvency practitioner fees and expenses
- Preferential creditors (e.g. employee wages, certain pension contributions and HMRC in some situations)
- Secured creditors with floating charges
- Unsecured creditors (e.g. suppliers, HMRC in some situations)
Directors can’t pick and choose which creditors to pay. All must be treated fairly.
Regulations specific to solvent liquidation (MVL)
If your company is solvent, different regulations apply. Before an MVL, directors must sign a Statutory Declaration of Solvency confirming that all debts can be paid within 12 months.
Making a false declaration is a criminal offence under the Insolvency Act. If the company turns out to be insolvent after all, the MVL will be converted to a CVL and your conduct will be reviewed.
To avoid this, directors should work with an insolvency practitioner who can test solvency properly and prepare the declaration in line with regulations.
How liquidation regulations protect directors
While these rules might seem daunting, they’re not designed to punish directors who act in good faith. In fact, following them properly protects you by showing that you’ve:
- Taken responsible steps once insolvency became clear
- Prioritised creditor interests
- Used the correct legal procedure
- Worked with a licensed professional
That compliance can make the difference between a smooth closure and a stressful investigation.
The role of your insolvency practitioner
Your insolvency practitioner’s role is to ensure that every regulation is met and to take the administrative and legal pressure off your shoulders.
They’ll:
- Manage all creditor communication
- Handle the sale and distribution of assets
- File the necessary reports and notices
- Ensure your conduct is reviewed fairly
- Keep you updated at every stage
By working with an experienced insolvency practitioner, you can close your company confidently and compliantly.
Key takeaways: liquidation regulations
- Liquidation is a regulated legal process governed by the Insolvency Act 1986 and related rules.
- Only licensed insolvency practitioners can act as liquidators.
- Directors must stop trading when insolvent and act in creditors’ best interests.
- All asset sales and creditor payments must follow strict legal order.
- Director conduct is always reviewed but cooperation and early advice show you’ve met your duties.
Need help navigating liquidation regulations?
If you’re unsure whether your company is insolvent, or you’re worried about meeting your legal obligations, professional help can give you clarity fast.
Our licensed insolvency practitioners specialise in insolvent liquidation, guiding UK directors through every regulatory requirement with care and precision.
We’ll explain what the rules mean for you, how to stay compliant and what your safest next steps are, whether that’s business rescue or company closure.
Get free, confidential advice today and take back control of your company’s situation.
