Should I Close My Company or Enter Liquidation?
The key difference is whether the business is insolvent: in simple terms, insolvency means the business cannot realistically meet its financial obligations. If your company has debts it cannot pay, liquidation is usually the correct and legally compliant option. If your company is solvent, with no outstanding creditors or HMRC debt, you may be able to close it through voluntary strike off. Choosing the wrong route can potentially expose you to personal liability and director investigation.
Quick Answer: Close a Company vs Enter Liquidation
You should close your company using strike off only if it has no debts and can pay all liabilities in full. If the company is insolvent, meaning it cannot pay creditors when due, formal liquidation is normally required. Liquidation protects creditors and ensures director responsibility is properly managed.
Strike Off vs Liquidation: Understanding the Key Differences
Strike off is an informal process through Companies House to remove a company from the register. It is suitable only for solvent companies with no outstanding debts.
Liquidation is a formal insolvency procedure managed by a licensed insolvency practitioner. Assets are realised and distributed to creditors in a structured way.
A company is insolvent if it cannot pay debts when they fall due or its liabilities exceed its assets.
How UK Insolvency Law Deals With Company Closure
If applying for strike off:
- Directors submit form DS01 to Companies House.
- Creditors are notified.
- If no objections are received, the company is dissolved and removed from the register.
If entering liquidation:
- Directors appoint a licensed insolvency practitioner.
- Creditors are formally notified.
- Assets are valued and sold.
- Funds are distributed in legal priority order.
Once a company is insolvent, director responsibility shifts towards protecting creditor interests.
Director Risks, Duties and Personal Liability Explained
When a company is insolvent or close to insolvency, director responsibility changes. Your legal duty shifts from protecting shareholders to protecting creditors. Making the wrong decision at this stage can create personal risk.
Risks
Personal liability for wrongful trading
If you continue trading when you knew, or ought to have known, that the company could not avoid insolvency, a court can order you to contribute personally to creditor losses. This risk increases if debts to suppliers, lenders or HMRC continue to grow without a realistic recovery plan.
Director disqualification
The Insolvency Service reviews director conduct in liquidation. If misconduct is found, such as failing to act in creditor interests or allowing debts to escalate irresponsibly, you may face disqualification from acting as a director for up to 15 years.
Creditor challenges if strike off is misused
Attempting to dissolve an insolvent company through strike off can trigger formal objections. Creditors can apply to restore the company to the register. Once restored, recovery action can continue and scrutiny of director conduct increases.
HMRC objection to dissolution
HMRC actively monitors strike off applications. If tax liabilities such as VAT, PAYE or Corporation Tax remain unpaid, HMRC will usually object. This can result in enforcement action or compulsory liquidation.
Responsibilities
Act in the interests of creditors when insolvency is likely
Once insolvency is probable, directors must prioritise creditor protection. This includes avoiding preferential treatment of certain creditors and ensuring decisions are commercially justified.
Avoid worsening creditor losses
Continuing to take deposits, incur credit, or delay action when the company cannot meet its liabilities can increase personal exposure. Early advice reduces this risk.
Maintain proper financial records
Accurate accounting records are a legal requirement. Poor record keeping can lead to investigation findings against a director and complicate insolvency proceedings.
Protections for Directors
Liquidation creates a structured legal process
Entering formal liquidation places the company under the control of a licensed insolvency practitioner. This demonstrates that directors have taken responsible action once insolvency became clear.
Independent oversight from an insolvency practitioner
An insolvency practitioner ensures assets are handled correctly, creditors are treated fairly, and statutory duties are met. This professional oversight provides evidence of compliance.
Reduced risk of personal claims if handled properly
Taking timely professional advice and entering the appropriate insolvency procedure significantly reduces the likelihood of wrongful trading claims or personal contribution orders.
A common misunderstanding is that strike off is an easier way to remove debt. It is not a solution for an insolvent company. Creditors, including HMRC, can object to dissolution and restore the company to pursue recovery action. Acting early and choosing the correct legal route protects both creditors and directors.
Decision Rules: When Should You Close or Liquidate?
- IF the company has no debts → THEN strike off may be appropriate.
- IF the company has unpaid creditors → THEN liquidation is likely required.
- IF HMRC debt exists → THEN strike off will usually be challenged.
- IF the company is insolvent → THEN directors must prioritise creditors.
- IF you continue trading while insolvent → THEN personal liability risk increases.
How Closure or Liquidation Links to CVA, Administration and Dissolution
Creditors Voluntary Liquidation (CVL)
Used when the company cannot pay its debts. Provides an orderly closure and a clear framework for dealing with creditors.
Administration
Used where there may be a chance of rescue or business sale. The aim is to protect the company from creditor action while options are explored.
Company Voluntary Arrangement (CVA)
Allows structured repayment while continuing to trade, often as an alternative to immediate liquidation where the underlying business remains viable.
Dissolution
Dissolution through strike off is only appropriate for solvent, debt-free companies. It should not be used as a way to avoid paying creditors or HMRC, and any outstanding liabilities should be settled before applying.
If you are unsure which route applies, reviewing your position through clear business closure guidance and taking professional advice can clarify the correct approach.
What Directors Should Do Immediately
- Review current creditor balances, including any HMRC debt.
- Check whether the company can pay debts as and when they fall due.
- Stop taking further credit if insolvency is likely.
- Prepare up to date financial records.
- Speak to a licensed insolvency practitioner for a clear, tailored recommendation.
Real UK Company Closure and Liquidation Scenarios
Small service business
A small consultancy with no debts and dormant status applies for strike off successfully, as there are no outstanding creditors or HMRC liabilities.
Director facing mounting supplier debt
The company cannot pay invoices or VAT. Liquidation protects creditors, ensures an orderly wind-down, and reduces the risk of personal exposure for the director.
HMRC pressure case
A company with PAYE and VAT arrears attempts strike off. HMRC objects and the application is blocked. Formal liquidation then becomes necessary to deal properly with liabilities.
How Professional Insolvency Advice Protects You
Speaking to a licensed insolvency practitioner gives clarity. We assess whether the company is insolvent, explain director responsibility, and outline the appropriate option. If liquidation is required, we manage the process professionally and ensure compliance. If strike off is suitable, we confirm that risk is minimal.
Clear advice early reduces stress and protects you from avoidable personal exposure.
Frequently Asked Questions About Closing a Company or Liquidation
Can I strike off a company with debts?
You can apply, but creditors are likely to object. Strike off is not appropriate for an insolvent company and can lead to the company being restored so creditors can pursue recovery.
Will HMRC object to strike off?
Yes, if tax liabilities such as VAT, PAYE or Corporation Tax remain unpaid, HMRC will usually object and may commence enforcement or liquidation action.
Does liquidation mean I am personally liable?
Not automatically. Personal liability depends on director conduct. Many directors complete liquidation without personal contribution orders where they have acted reasonably and taken timely advice.
Is liquidation better than dissolution?
If the company is insolvent, liquidation is the correct legal process. Dissolution is only suitable where the company is solvent and debt free.
When should I seek advice?
As soon as the company struggles to pay debts when due.