When a company goes into liquidation, directors are often left wondering what happens to the contracts and lease obligations they’ve signed while trading. Whether it’s a commercial lease, supplier agreement, or equipment finance deal, these commitments can feel like a weight hanging over you.
Understanding how these are handled is an important part of the liquidation process. This guide breaks everything down in clear terms and explains how the team at Simple Liquidation helps directors navigate this complex area with confidence.
What Is Liquidation?
Liquidation is the formal process of closing down a company and distributing its assets to creditors. There are two main types:
- Creditors’ Voluntary Liquidation (CVL) – where directors choose to close an insolvent company
- Compulsory Liquidation – where a creditor forces closure through court proceedings
Once liquidation begins, a licensed insolvency practitioner is appointed to take control of the company. That includes managing contracts, assets, liabilities, and communications with creditors.
Simple Liquidation was designed to provide directors like you with a quick and simple solution to liquidate a company, no matter the size or industry. Our experienced team ensures the process is handled legally, efficiently, and with minimal stress for you as a director.
What Happens to Existing Contracts?
Contracts do not simply vanish when liquidation begins. Each one needs to be assessed by the insolvency practitioner to determine whether it should be continued or terminated.
This process involves deciding whether to adopt or disclaim each contract.
Reviewing Contracts and Agreements
The insolvency practitioner will examine all ongoing agreements, such as:
- Leases on commercial property
- Hire purchase or finance contracts
- Supplier agreements
- Software licences
- Service contracts
- Franchise deals
If the agreement is no longer beneficial to the company or is financially burdensome, it will be disclaimed. This means the company is no longer bound by its terms.
At Simple Liquidation, our licensed practitioners work through this process methodically, ensuring directors understand the impact of each contract and whether there are any personal implications to be aware of.
Disclaiming Onerous Contracts
Under Section 178 of the Insolvency Act 1986, liquidators have the power to disclaim any contract or property that is considered “onerous.” This could be:
- An expensive lease on unused premises
- A one-sided service agreement that drains funds
- A long-term deal that now offers no value
Once disclaimed, the other party may become an unsecured creditor in the liquidation. While the contract is ended from the company’s side, that party can still submit a claim for any losses suffered.
This is where our experience at Simple Liquidation really comes into play. We ensure all disclaimers are handled legally, and all relevant parties are notified correctly, protecting you from unnecessary disputes.
What Happens to Commercial Leases?
Leases are a big worry for most directors. Many companies commit to multi-year leases that are hard to exit without penalties.
If the lease is no longer useful, for instance, the company has stopped trading or the rent is unsustainable, the insolvency practitioner will disclaim the lease. This means the landlord can no longer expect future payments from the company.
However, the landlord can claim for unpaid rent or losses and becomes an unsecured creditor.
Personal Guarantees on Leases
One critical area to check is whether any personal guarantees were given. Many directors don’t realise they’ve signed one until it’s too late.
If a personal guarantee was signed, the landlord can still pursue the director individually for unpaid rent, even after the company is closed. This is separate from the company’s obligations and must be dealt with independently.
Simple Liquidation always reviews lease agreements and personal guarantees as part of our initial consultation, giving you full clarity from day one.
What About Hire Purchase or Finance Agreements?
Assets on finance, such as vans, computers, or machinery, are handled based on their value and the remaining debt.
- If the asset is worth more than what’s owed, the liquidator may sell it and repay the lender.
- If it’s worth less than the outstanding finance, the item is typically returned, and the shortfall is claimed in the liquidation by the lender.
These agreements can become complex quickly, especially when multiple creditors or personal guarantees are involved. The insolvency practitioners behind Simple Liquidation have over 30 years’ experience dealing with such scenarios and can ensure each agreement is closed off correctly.
Can Contracts Be Transferred?
Some directors consider starting fresh under a new company and wonder whether they can take old contracts with them.
Transferring contracts can happen in a pre-pack sale, where a new company purchases assets and contracts from the old company before liquidation completes. This often requires consent from the other party involved in the contract.
It’s important to understand that any personal guarantees may still apply even if the business changes hands.
We advise directors clearly on what can and cannot be transferred, and help structure asset sales correctly when a pre-pack scenario is being considered.
What Happens to Employees?
Employment contracts are automatically terminated once the company goes into liquidation. Employees become creditors and can claim for:
- Unpaid wages
- Holiday pay
- Notice pay
- Redundancy
These claims are often made through the Redundancy Payments Service, which is backed by the UK government.
Directors who were paid through PAYE may also be eligible for redundancy. In many cases, this redundancy pay can be used to fund the cost of liquidation, something we can help you assess at Simple Liquidation.
Directors’ Responsibilities
As a director, you are legally responsible for acting in the best interests of creditors once your company becomes insolvent. That means you cannot continue trading, take on more debt, or ignore existing obligations.
Failing to take proper action could lead to accusations of wrongful trading or misfeasance. Engaging a licensed insolvency practitioner like those at Simple Liquidation ensures that you fulfil your legal duties and protect yourself from personal risk.
Speak to Us for Personalised Guidance
If your company has active leases, contracts or finance agreements, and you’re considering liquidation, don’t guess your way through it. Every agreement is different, and your personal exposure can vary greatly depending on what you’ve signed.
Simple Liquidation is not a broker or middleman, we are an experienced team of licensed insolvency practitioners who guide directors like you through every step of the liquidation process. Our firm is regulated by the ICAEW and the Insolvency Practitioners Association, and we’ve helped hundreds of directors close companies smoothly and compliantly.
We’re happy to offer a no-obligation conversation to help you explore the best path forward for your situation. Whether you’re trying to understand the impact of a lease, dealing with personal guarantees, or unsure how to start, we’re here to help.