Receiving liquidator demand layer asking for payment or information is a moment most directors will remember clearly. Whether it alleges wrongful trading, an unlawful dividend, a preference, or seeks repayment of an overdrawn director’s loan account, the consequences can be serious if handled incorrectly. This article sets out a structured, practical response plan for directors who have just received a liquidator’s demand, explaining what the correspondence usually means, what risks may arise, and most critically, what to do next.

Liquidator Demands Just Arrived? A Step-by-Step Response Plan for Directors

SzeChze Tey December 17, 2025

Receiving a letter from a liquidator demanding payment or information is a moment most directors will remember clearly. Whether it alleges wrongful trading, an unlawful dividend, a preference, or seeks repayment of an overdrawn director’s loan account, the consequences can be serious if handled incorrectly.

This article sets out a structured, practical response plan for directors who have just received a liquidator’s demand, explaining what the correspondence usually means, what risks may arise, and most critically, what to do next.

Step 1: Do Not Ignore the Letter (and Do Not Respond Hastily)

Liquidator demand letters are rarely speculative. By the time correspondence is sent, the liquidator will usually have reviewed accounting records, bank statements, and statutory filings. Silence can be interpreted as avoidance, while a rushed or informal response may inadvertently concede liability.

At this stage, directors should:

Note any deadlines stated in the letter
Preserve all company records immediately
Avoid informal communications with the liquidator

Directors should not provide explanations, admissions, or documents beyond what is strictly required until specialist advice has been obtained.

Step 2: Identify the Nature of the Claim

Liquidators’ demands vary significantly. The legal basis of the claim determines both risk and strategy. Common categories include:

Director’s Loan Account (DLA) Repayments

If a director has withdrawn more from the company than was credited, the liquidator may seek repayment of the overdrawn balance. While these claims can appear straightforward, there may be scope to dispute the figures, raise set-offs, or challenge how the account has been constructed.

Unlawful Dividends

Dividends paid when there were insufficient distributable reserves are potentially recoverable. Directors are often both the decision-makers and recipients, which can increase exposure, particularly where financial information was incomplete or inaccurate.

Preferences

Payments to directors or connected parties in the period before insolvency may be challenged if they had the effect of placing the recipient in a better position than other creditors.

Misfeasance or Breach of Duty

These claims are broader and may involve allegations of misuse of company funds, failure to safeguard assets, or inadequate financial oversight.

Wrongful Trading

Among the most serious allegations, wrongful trading claims assert that directors allowed the company to continue trading when insolvency was unavoidable. These claims are fact-sensitive and require careful analysis of the company’s financial position and decision-making at the time.

Step 3: Examine the Insolvency Timeline

Timing is critical. Many claims depend on when the company became insolvent, when particular transactions occurred, and what the directors knew (or ought to have known) at the relevant time.

Directors should establish:

The date of liquidation
The insolvency date relied upon by the liquidator
Whether the transaction falls within statutory look-back periods

Liquidators’ assumptions as to insolvency dates are not always beyond challenge, particularly where cash-flow and balance-sheet insolvency do not align.

Step 4: Review the Evidence, Not Just the Allegations

Liquidators often summarise conclusions without providing full supporting documentation at the demand stage. Directors are entitled to understand how figures have been calculated and what records underpin the claim.

Key areas to review include:

The accuracy of the director’s loan account
Treatment of salary, expenses, or dividends
Availability and reliability of management accounts
Whether professional advice was taken at the time

Historic bookkeeping errors are common, particularly in owner-managed businesses, and can materially affect both liability and quantum.

Step 5: Take Specialist Insolvency Advice Early

Liquidator claims sit at the intersection of company law, insolvency law, and litigation risk. Early advice from an insolvency solicitor experienced in director defence work can significantly affect the outcome.

A specialist adviser can:

Assess the merits of the claim
Identify statutory and factual defences
Control communications with the liquidator
Explore settlement or mitigation strategies

Importantly, legal advice is protected by privilege. Correspondence with a liquidator is not.

Step 6: Consider Defences and Mitigation

Not every liquidator’s demand is enforceable, and even where liability exists, it may be reduced.

Depending on the claim, relevant considerations may include:

Whether the director reasonably believed the company was solvent
Reliance on accountants or other professional advisers
Steps taken to minimise losses to creditors
Whether payments were genuinely for value

In wrongful trading cases, evidence of regular financial monitoring, early engagement with advisers, and responsible decision-making can be decisive.

Step 7: Litigation Is Not Always the End Point

Many liquidator claims are resolved without court proceedings. Liquidators are required to act in creditors’ interests and will often consider commercial settlement where liability is disputed or recovery is uncertain.

A structured, well-advised response can:

Narrow the issues in dispute
Reduce the claimed sum
Agree manageable repayment terms
Avoid the cost and stress of litigation

By contrast, an unadvised or confrontational approach can escalate matters unnecessarily.

Step 8: Understand the Personal Implications

Liquidator claims are pursued personally against directors. Company liquidation does not provide protection from recovery actions, and adverse findings may carry wider consequences, including personal judgments, bankruptcy risk, or director disqualification proceedings.

This underlines the importance of addressing matters promptly and strategically.

Conclusion & How We Can Help

Receiving a demand from a liquidator does not automatically mean that you have done something wrong. However, how you respond can significantly affect the outcome.

By acting promptly, keeping clear records, and taking specialist advice at the right time, many risks can be managed or avoided altogether.

We are here to help. We offer a no-cost, no-obligation 20-minute introductory call to discuss the position and identify immediate priorities. Where more detailed guidance is required, we can offer a one-hour fixed-fee appointment, typically starting from £250 plus VAT, depending on complexity and the seniority of the fee earner involved.

To arrange an initial discussion, please email wewillhelp@jonathanlea.net with any relevant background information to ensure the call is as productive as possible, or telephone 01444 708640. Following the call, we can provide a clear scope of work, a fee estimate (or fixed-fee quote where appropriate), and confirmation of next steps.

VAT is charged at 20%.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.