Company Liquidation: A Creditor’s Guide

Company Liquidation: A Creditor’s Guide #

Liquidation is the formal process of closing a company, selling its assets, and distributing the proceeds to creditors. As a creditor, understanding your rights and taking the right actions early can increase your chances of recovering debt.

Types of Liquidation & What It Means for Creditors #

There are two main types of company liquidation in the UK:

1. Creditors’ Voluntary Liquidation (CVL) – Initiated by Directors #

  • Directors voluntarily shut down an insolvent company.
  • You can vote on the liquidator appointment and oversee their actions.
  • The liquidator will investigate whether the directors acted improperly before insolvency.
  • You must submit a proof of debt to be considered for payment.

2. Compulsory Liquidation – Forced by Creditors #

  • You (or another creditor) can apply to court to wind up a company that owes you money.
  • The court appoints a liquidator to investigate and distribute assets.
  • Directors face a stricter investigation (including possible disqualification).
  • If the company traded while insolvent, directors could be personally liable.

Important: If directors transferred assets, paid certain creditors unfairly, or misused company funds before liquidation, you may have grounds to challenge transactions and increase your recovery.

Your Rights as a Creditor in Liquidation #

1. Submit a Proof of Debt #

To be included in the liquidation payout, you must submit a formal proof of debt to the liquidator.

  • The form requires details of the debt, supporting invoices, and agreements.
  • The liquidator reviews and either accepts, reduces, or rejects your claim.
  • Miss the deadline? You may lose your right to recover anything.

Action: Check with the liquidator as soon as liquidation starts and submit your proof of debt early.

2. Challenge Unfair Transactions #

Before liquidation, directors may have moved assets, paid off some creditors while ignoring others, or misused company funds.

You can challenge:

  • Preferential payments (directors paying themselves or certain creditors unfairly).
  • Transactions at undervalue (selling assets cheaply to avoid creditor claims).
  • Director misconduct (e.g., wrongful trading, fraudulent trading).

Action: If you suspect foul play, raise concerns with the liquidator and request an investigation.

3. Vote on the Liquidator Appointment #

In a Creditors’ Voluntary Liquidation (CVL), creditors can nominate a liquidator (the person who handles the asset sale and investigations).

  • If you hold a large portion of the company’s debt, your vote carries weight.
  • A well-chosen liquidator can prioritize creditor interests and hold directors accountable.

Action: Attend the creditors’ meeting and vote on the liquidator to ensure transparency.

4. Join the Creditors’ Committee #

A Creditors’ Committee gives creditors direct oversight over the liquidation process.

  • Members review the liquidator’s actions and challenge any decisions.
  • If misconduct is found, the committee can push for director penalties or additional asset recovery.

Action: If you are a significant creditor, join the committee to protect your interests.

Payment Order: Who Gets Paid First? #

Once assets are sold, creditors receive payouts in a strict legal order:

  1. Secured Creditors (Fixed Charge Holders) – Banks or lenders with asset-backed loans.
  2. Liquidation Costs – Fees for the liquidator and legal expenses.
  3. Preferential Creditors – Employee wages, pensions, and certain tax liabilities.
  4. Floating Charge Holders – Banks with floating security over general company assets.
  5. Unsecured Creditors (You!) – Suppliers, customers, landlords, and lenders without security.
  6. Shareholders – Rarely receive anything unless all debts are paid in full.

Reality Check: If you’re an unsecured creditor, you may receive only a small percentage of what you’re owed—or nothing at all.

Action: If the company had valuable assets, ensure the liquidator maximizes their sale value to increase creditor payouts.

How to Force a Company into Liquidation #

If a company owes you over £750 and refuses to pay, you can take legal action.

Step 1: Issue a Statutory Demand #

  • A formal demand for payment within 21 days.
  • If unpaid, you can petition the court for liquidation.

Step 2: File a Winding-Up Petition #

  • Costs £2,000–£3,000 in legal fees.
  • If granted, the court forces the company into liquidation and appoints a liquidator.

Action: Consider this option only if the company has assets, or it may not be worth the cost.

Key Takeaways for Creditors #

  • Act quickly – Submit proof of debt early to avoid missing deadlines.
  • Challenge director misconduct – If assets were misused, push for investigations.
  • Join the creditors’ committee – Directly influence how the liquidation is handled.
  • Force liquidation if needed – If the company refuses to pay, consider a winding-up petition.

Next Steps: Stay proactive and engage with the liquidator to maximize your debt recovery.