# What happens if the company goes into liquidation? The three types of company liquidation, what happens to creditors, the director's personal position, and how to avoid reaching that point. **Site:** [creditcorp.co.uk/learn/what-happens-if-the-company-goes-into-liquidation/](https://creditcorp.co.uk/learn/what-happens-if-the-company-goes-into-liquidation/) Creditcorp is the site name for the Credicorp group. Credicorp Limited is the lender behind it: short-term working capital for incorporated UK businesses. This page is a guide; applications go to [credicorp.co.uk](https://credicorp.co.uk/). The borrower is the **company**: a UK limited company, LLP or PLC. Credicorp does not require a personal guarantee, does not take a charge over a director's home, and does not lend to sole traders or consumers. ## Contents - What liquidation means - The three types of company liquidation - What happens to company debts - The director's personal position - How to avoid liquidation - Frequently asked questions - Ready to apply? ## What liquidation means Liquidation is the formal legal process for winding up a company that cannot, or no longer needs to, continue trading. It is not the same as administration, receivership, or a Company Voluntary Arrangement (CVA). Once a company enters liquidation, the goal is to realise assets, pay creditors in the statutory order, and dissolve the company at Companies House. For directors of UK limited companies, understanding what liquidation means - including what it does not mean for them personally - is important. The key point is that a limited company is a separate legal person from its directors and shareholders. The company's debts are not automatically the director's debts. ## The three types of company liquidation ### Creditors' Voluntary Liquidation (CVL) A CVL is the most common form of insolvent liquidation. The directors and shareholders of an insolvent company agree to wind it up voluntarily before a creditor forces the issue through the courts. A licensed insolvency practitioner is appointed as liquidator. The insolvency practitioner realises the company's assets and distributes the proceeds to creditors in priority order. A CVL is generally preferable to compulsory liquidation because it gives directors more control over the process, is faster, tends to produce a better outcome for creditors, and demonstrates that directors acted responsibly. ### Members' Voluntary Liquidation (MVL) An MVL is used when a solvent company is wound up and all creditors can be paid in full. Common reasons include the company having completed its purpose, shareholders wanting to extract retained profits in a tax-efficient way, or a business restructuring that requires a subsidiary to be dissolved cleanly. An MVL is not a sign of financial distress. ### Compulsory liquidation Compulsory liquidation is triggered by a court order, usually after a creditor successfully petitions to wind up the company because it has not paid an undisputed debt. A winding-up order is made; the court appoints the Official Receiver, who may then hand the case to a licensed insolvency practitioner. This is usually the outcome directors, creditors and the courts most want to avoid. It is slower, more costly, and typically produces the worst returns for unsecured creditors. ## What happens to the company's debts in liquidation? The Insolvency Act 1986 sets a strict priority order for how the proceeds of liquidation are distributed: 1. **Liquidation costs** - the insolvency practitioner's fees and the cost of realising assets. 2. **Secured creditors with a fixed charge** - those holding a legal mortgage or fixed charge over a specific asset. 3. **Preferential creditors** - principally employees for outstanding wages up to statutory limits and occupational pension contributions. 4. **Secured creditors with a floating charge** - typically a bank holding a debenture, after any prescribed part for unsecured creditors is set aside. 5. **Unsecured creditors** - trade suppliers, HMRC for many liabilities, and most short-term business lenders. These creditors share whatever is left. 6. **Shareholders** - any remaining surplus after all creditors are paid in full. In an insolvent liquidation, unsecured creditors often receive a small dividend or nothing. Once liquidation is completed and distributions are made, any remaining unsatisfied company debts are extinguished. The company is dissolved and struck off the Companies House register. ## The director's personal position A limited company is separate from its directors and shareholders. The company borrows, the company owes, and the company enters liquidation. - **No personal guarantee:** if the director has not signed a personal guarantee, they are not personally liable for the company's debts. Credicorp does not take personal guarantees; the loan is to the company only. - **No personal credit impact:** the company's insolvency does not appear on the director's personal credit file. A CVL, MVL or compulsory liquidation is a company event, not a personal one. - **Director conduct review:** the liquidator must report on the director's conduct. Directors who acted responsibly and in the interests of creditors as insolvency approached have less to fear. - **Wrongful trading risk:** if a director continued to allow the company to trade and incur debt when they knew, or ought to have known, that insolvent liquidation was unavoidable, a court can order them to contribute to the company's assets. The practical defence is to take every step to minimise losses to creditors, including seeking professional insolvency advice promptly. ## How to avoid liquidation If the company is struggling, act early and seek professional advice. Options before liquidation include: - **Informal creditor negotiation:** contacting creditors directly to agree extended payment terms or a reduced settlement. - **Company Voluntary Arrangement (CVA):** a formal, legally binding agreement with creditors to repay a proportion of debts over time, supervised by an insolvency practitioner. - **Administration:** a rescue procedure aimed at saving the company, achieving a better outcome for creditors than liquidation, or realising assets for secured creditors. - **Pre-pack administration:** the business and assets are sold, often to a new vehicle, immediately after the company enters administration. An insolvency practitioner can advise on the most appropriate route. The sooner directors seek that advice, the more options are usually available. ## Frequently asked questions **What is company liquidation?** Liquidation is the legal process of winding up a limited company: converting its assets into cash, paying creditors in the statutory order of priority, and then dissolving the company at Companies House. Once liquidation is complete, the company ceases to exist as a legal entity. **What are the three types of company liquidation in the UK?** The three types are Creditors' Voluntary Liquidation, Members' Voluntary Liquidation and compulsory liquidation. A CVL is used for an insolvent company and is initiated voluntarily by directors and shareholders. An MVL is used for a solvent company. Compulsory liquidation is ordered by a court, usually after a creditor's winding-up petition. **What happens to the company's debts in liquidation?** The liquidator collects and sells company assets, then distributes the proceeds according to the Insolvency Act 1986 priority order. If there are insufficient assets to pay creditors in full, unsecured creditors receive a dividend or nothing. The remaining company debt is extinguished when liquidation completes. **Does the director personally owe the lender anything in liquidation?** Not if there is no personal guarantee and no misconduct. Credicorp does not take personal guarantees. The loan is made to the company, and the company is liable. A director can become personally exposed only in exceptional cases, such as wrongful or fraudulent trading. **What should a director do before the company reaches liquidation?** Seek professional advice as soon as the company is struggling to meet its obligations. An insolvency practitioner can advise on restructuring, a CVA, administration, or a managed winding-down. Acting early protects the director and usually produces better outcomes for creditors. **Can a company borrow from Credicorp if it is already insolvent?** No. Credicorp carries out an affordability assessment before any loan is made. A company that is technically insolvent is unlikely to pass that assessment. If the company is in financial difficulty, the right step is professional insolvency advice, not more borrowing. ## Related guides - [What is a Company Voluntary Arrangement (CVA)?](/learn/what-is-a-company-voluntary-arrangement-cva/) - [Can a company with a winding-up petition borrow?](/learn/can-a-company-with-a-winding-up-petition-borrow/) - [What happens if you miss a repayment](/learn/what-happens-if-you-miss-a-repayment/) - [What is a debenture and does Credicorp take one?](/learn/what-is-a-debenture-and-does-credicorp-take-one/) - [How affordability is assessed](/learn/how-affordability-is-assessed/) - [All learn guides](/learn/) ## Ready to apply? Applications, account management and product details are at [credicorp.co.uk](https://credicorp.co.uk/). Your company borrows; you do not.