Thinking of Liquidating Your Company? What Directors Should Check Before Taking Insolvency Advice
For many company directors, the idea of liquidation is daunting. It often arrives at a time of intense financial pressure, personal stress, and uncertainty about legal responsibilities. While taking insolvency advice early is usually sensible, directors should pause to understand their position before committing to a particular route or adviser.
Liquidation is not always the only option, and the steps taken immediately before seeking advice can significantly affect both the company’s outcome and the director’s personal exposure. This article outlines key issues directors should consider before taking insolvency advice, so they can approach that advice informed, prepared, and protected.
1. Is the Company Actually Insolvent?
A company is not insolvent simply because it is struggling. Under UK law, insolvency is assessed primarily by two tests:
- Cash flow insolvency – the company cannot pay its debts as they fall due
- Balance sheet insolvency – the company’s liabilities exceed its assets
- “Legal action” indicators – for example, unsatisfied statutory demands or enforcement action for unpaid debts.
Directors should not assume insolvency without reviewing up-to-date financial information. Short-term cash flow problems, delayed payments, or disputes with creditors do not automatically mean liquidation is inevitable.
Before speaking to an insolvency practitioner, directors should check:
- Current bank balances and overdraft limits
- Aged creditor and debtor lists
- Whether debts are genuinely due and payable
- Whether pressure is coming from one creditor or several
This initial assessment can help clarify whether the company is insolvent now, at risk of becoming insolvent, or simply under commercial strain.
2. Are There Immediate Legal Duties to Consider?
Once a company is insolvent, or insolvency is probable on a realistic view of the facts, directors’ duties shift. Instead of focusing primarily on shareholders’ interests, directors must act in the best interests of creditors as a whole.
This does not mean directors must immediately liquidate the company. However, it does mean that certain actions can later be scrutinised, including:
- Continuing to trade without a reasonable prospect of avoiding insolvency
- Paying some creditors in preference to others
- Transferring assets out of the company
- Increasing creditor losses unnecessarily
Understanding this duty before taking advice is important, as some steps taken in good faith can later be challenged by a liquidator, and may lead to claims for wrongful trading, misfeasance, or recovery of certain transactions.
3. What Has Happened in the Last Two Years?
One of the most common surprises for directors is the extent to which a liquidator can review past conduct.
In a liquidation, an office-holder will typically examine transactions entered into up to two years (and in some cases longer) before insolvency. This may include:
- Payments to connected parties
- Director loan account movements
- Asset sales at undervalue
- Repayments of director guarantees
- Dividends paid when profits were insufficient
In some cases, shorter or longer “look-back” periods apply (for example, preferences to unconnected creditors can have 6-month period, and some claims can reach back beyond two years).
Before seeking insolvency advice, directors should reflect on whether any such transactions have taken place. This does not mean wrongdoing has occurred, but being aware of potential issues allows directors to seek balanced advice rather than reactive reassurance.
4. Are You Personally Exposed?
Liquidation is often seen as the end of a company, but not necessarily the end of risk for directors.
Directors should consider whether they have:
- Signed personal guarantees for company borrowing
- Overdrawn director loan accounts
- Given HMRC time-to-pay arrangements personally backed by assurances
- Acted as a guarantor on leases or supplier agreements
There may also be exposure to contribution claims (for example, for wrongful trading) or disqualification proceedings where there has been serious misconduct.
Insolvency advice that focuses only on closing the company, without addressing personal exposure, may be incomplete. Directors should be clear about what liabilities may survive liquidation and what steps (if any) can be taken to manage them.
5. Have All Rescue Options Been Considered?
Liquidation is a terminal process. Once commenced, the company will cease trading and eventually be dissolved.
Before committing to that step, directors should consider whether alternative options may still be available, such as:
- Informal creditor negotiations
- Time-to-pay arrangements with HMRC
- Company Voluntary Arrangements (CVAs)
- Refinancing or asset sales
- Changes to the business model or cost base
Not every company can be saved, and in many cases liquidation may be the most appropriate outcome. Directors should ensure that advice has genuinely explored whether rescue is realistic, rather than defaulting to liquidation as the most convenient or quickest solution.
6. Who Is Giving the Advice – and What Is Their Role?
Not all insolvency advice is the same. Some advisers are regulated insolvency practitioners, while others are introducers or consultants who may only be able to offer limited options.
Directors should understand:
- Whether the adviser is regulated, and by whom
- Whether they will act as liquidator or simply refer the case on
- Whether the advice is independent or linked to a particular outcome
- What fees are payable, and when
It is reasonable for directors to take legal advice alongside insolvency advice, particularly where there are concerns about director conduct, personal exposure, or potential claims. Taking early independent legal advice can help directors document their decision‑making and demonstrate that they have acted responsibly.
7. Are You Acting Early Enough?
One of the most important questions directors should ask themselves is whether they are acting early enough.
Delaying advice can:
- Increase creditor losses
- Reduce available options
- Increase the risk of wrongful trading allegations
- Limit the ability to negotiate with creditors
Taking advice does not mean committing to liquidation immediately. It can simply be a way of understanding the landscape, making informed decisions, and evidencing that the board has actively engaged with emerging financial distress rather than ignoring it.
Conclusion
Liquidating a company is a significant legal and commercial decision, and one that should not be taken lightly. Before taking insolvency advice, directors should ensure they understand the company’s true financial position, their legal duties, and their potential personal exposure.
Informed directors are better placed to ask the right questions, challenge assumptions, and ensure that any advice received genuinely serves both the company’s position and their own legal interests.
Early, balanced advice – including legal advice where appropriate – can make a substantial difference to outcomes, even where liquidation ultimately proves unavoidable.
We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT depending on the complexity of the issues and seniority of the fee earner).
Please email wewillhelp@jonathanlea.net providing us with any relevant information or call us on 01444 708640. Following an initial discussion, we can provide a clear scope of work, a fee estimate, and confirm any information or documentation we would need to review.
* 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.