How to Prevent “Bite Back” from Liquidators When Closing a Company

Introduction

Closing a company through liquidation isn’t always the end of the story. For many directors, the real stress begins after the business has shut its doors, when liquidators begin reviewing the company’s conduct prior to closure. If any issues arise, directors may find themselves facing tough questions, financial penalties, or even personal liability.

To help you avoid these outcomes, here’s a practical guide on how to prevent “bite back” from liquidators and protect yourself when winding up a company.

Full Disclosure of Creditors

One of the first things a liquidator will examine is whether all creditors were properly disclosed.

It is essential to create a complete and accurate list of everyone the company owes money to, no matter how small the amount. This includes suppliers, banks, HMRC, landlords, employees, and anyone else your company has an outstanding obligation to.

Failing to list a creditor, or worse, deliberately omitting one, can be seen as a serious breach of duty. Liquidators are trained to identify patterns, and discrepancies in financial records or creditor lists raise red flags. Any attempt to conceal debts can be treated as misconduct and potentially reported to the Insolvency Service.

Transparency is your best protection here. Take the time to check your records carefully and ensure no creditor is left off the list, even if the amount owed is minor or “not worth mentioning.”

Proper Handling of Company Assets

When a company is preparing to close, the temptation to sell or transfer assets informally can be strong, especially to friends, family, or even the directors themselves. However, these types of transactions are one of the first things a liquidator will look for.

All company assets must be dealt with properly and clearly documented. If you sell an asset (e.g., equipment, stock, vehicles, or intellectual property), you must be able to show that the sale was made at fair market value. Undervalued sales to connected parties are often challenged and can be reversed by the liquidator.

If assets were given away for free or sold without a clear valuation or paper trail, this can lead to claims against the directors personally. To protect yourself, keep records of every sale, invoice, valuation, or asset disposal decision, even if it seems routine at the time.

No Preferential or Undue Payments

One of the biggest risks to directors before liquidation is making payments that favour one creditor over another. This is particularly sensitive where the payment is made to a connected party, such as a director, shareholder, or family member.

Under insolvency law, any payments made in the six months (and in some cases, two years) before liquidation that appear to give preferential treatment can be ‘clawed back’ by a liquidator. This means the recipient may be forced to repay the money, and in some cases, the director who authorised it could also be held liable.

The best approach is to treat all creditors equally. Avoid making last-minute payments to anyone you’re personally or professionally linked to, especially if other debts are still outstanding. If a payment is necessary, make sure you can justify it with clear reasoning and records.

Repay Directors’ Loans and Related-Party Transactions

If the company owes money to a director, or the director owes money to the company, it’s vital to address this properly before liquidation. Director loan accounts are a common area of scrutiny for liquidators.

Where the company owes a director money, this is treated like any other debt and should be listed with other creditors. However, if a director has borrowed money from the company (intentionally or unintentionally), this must be repaid or formally resolved.

Liquidators have a duty to recover these amounts, and they will pursue directors personally if the company is owed money. Any repayments or write-offs should be carefully documented and supported by accounting entries.

Statutory Payments

Liquidators are required to investigate how statutory obligations, such as tax and employee entitlements, were handled before the company ended. These payments are not just financial liabilities; they reflect a legal duty.

If your company owes money to HMRC for VAT, PAYE, or Corporation Tax, or if there are outstanding amounts owed to employees (such as wages, holiday pay, or redundancy), it’s important to ensure these are clearly recorded and not selectively overlooked.

Even if you cannot pay these sums in full, you must still treat them seriously. Ignoring statutory debts while settling private loans or other informal arrangements can look suspicious and expose you to scrutiny.

Stop Trading if Insolvent

Continuing to trade while insolvent is one of the most serious risks facing company directors. If you know (or reasonably should know) that the company cannot pay its debts as they fall due, you must stop incurring new liabilities and seek immediate advice.

Once insolvency is likely or confirmed, your duty as a director shifts. Your primary responsibility is no longer to the company or its shareholders; it’s to the company’s creditors. Any failure to recognise this can lead to allegations of wrongful trading.

This means that any new orders, contracts, or financial commitments entered after insolvency can be challenged later. If the court finds that directors continued trading in a way that worsened creditors’ losses, they may be ordered to contribute personally to the company’s debts.

Keep Comprehensive Records

Good record-keeping is one of your strongest defences against any future issues with a liquidator. If a liquidator questions how certain decisions were made or how funds were spent, having accurate documentation can make all the difference.

You should retain full financial records, including bank statements, invoices, and contracts, as well as communication such as emails, board meeting notes, and decision logs. These records should cover at least the last six years, in line with statutory requirements.

Losing or deleting key records before or during the winding-up process can raise concerns about mismanagement or concealment. Keep everything – even if you think it’s unimportant.

Transparent Communication

Once a liquidator is appointed, they will ask you to provide information about the company’s financial history, creditors, asset sales, and director conduct. How you respond to these queries matters.

You are legally required to cooperate with the liquidator and provide accurate, complete information. Delays, partial answers, or attempts to “spin” the truth can result in formal warnings or even referrals to the Insolvency Service.

Even if mistakes were made, honest and early disclosure is often viewed more favourably than denial or evasion.

Conclusion & How We Can Help

Winding up a company involves more than just filing forms and walking away. If not handled properly, the aftermath can result in investigations, reputational damage, or personal financial consequences for directors. The best way to avoid problems is to stay transparent, follow the rules, and seek advice. We are here to help.

If you require help, we 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 to £350 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 ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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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.