A company going into liquidation does not mean every contract ends immediately. Supplier agreements, customer contracts, leases, finance arrangements and other commitments can all be affected differently depending on their terms and the type of agreement involved.
Once a liquidator is appointed, they will review the company’s ongoing contractual position alongside its assets and debts. Some agreements may come to an end, some may need to continue temporarily, and others may give the company valuable rights or leave the other party with a claim in the liquidation.
Worried about ongoing contracts before liquidation?
If your company has unfinished work, customer commitments, supplier agreements or leases it may no longer be able to meet, get advice before cancelling contracts or taking on further obligations.
What Happens to Company Contracts When Liquidation Begins?
Company contracts can be affected in several different ways when liquidation starts. The result will depend on the agreement itself, whether the company is buying or supplying goods or services, and whether continuing with the contract would benefit the liquidation.
Some agreements may already contain valid rights allowing them to end. Others may remain in force while the liquidator decides how to deal with them. A supplier may also be restricted from relying on an insolvency clause simply because the company has entered liquidation.
| Contract type | What may happen in liquidation |
|---|---|
| Supplier agreement | May continue temporarily, with some insolvency-triggered termination rights restricted |
| Customer contract | May end, be completed in limited circumstances or leave the customer with a creditor claim |
| Commercial lease | May be surrendered, forfeited or disclaimed depending on the circumstances |
| Hire or finance agreement | Depends on ownership, the finance terms and the provider's rights |
| Software or service agreement | May continue where required, subject to the contract and insolvency rules |
| Valuable transferable contract | May potentially form part of a wider business or asset sale |
Directors should therefore avoid assuming that a contract can simply be ignored once liquidation becomes likely. It may represent a liability, but it could also have value that needs to be preserved.
Do Contracts Automatically End When a Company Goes Into Liquidation?
A company’s contracts do not all end automatically when liquidation begins. Insolvency clauses, termination provisions and general contractual rights still need to be considered alongside the rules that apply once the company has entered a formal insolvency process.
This means two agreements that appear very similar can produce different outcomes. A lease, for example, is not treated in exactly the same way as a continuing supply agreement, while a contract under which the company is providing services to a customer raises different issues again.
For directors preparing for a Creditors’ Voluntary Liquidation, it is useful to have copies of the actual signed terms available rather than relying on invoices, emails or an understanding of how the relationship usually works.
Can Suppliers Terminate a Contract Because the Company Is in Liquidation?
Some supplier contracts are protected from being terminated solely because the customer company has entered liquidation.
For many contracts involving the supply of goods or services to the insolvent company, section 233B of the Insolvency Act 1986 prevents an insolvency-triggered termination provision from taking effect simply because the company enters a relevant insolvency procedure. A supplier can also be prevented from exercising a termination right that arose before the insolvency procedure but had not yet been used.
That does not mean every supplier must continue indefinitely. The liquidator can consent to termination, a court can allow termination where continuation would cause the supplier hardship, and a fresh right arising after liquidation may still affect the contract. Suppliers also cannot normally insist that old pre-liquidation arrears are cleared as a condition of making supplies that the legislation requires them to continue.
The precise position should therefore be checked rather than assuming that the words “insolvency” or “liquidation” in a termination clause automatically settle the matter.
What Happens to Supplier Debts From Before Liquidation?
Supplier invoices that were already unpaid before liquidation will normally become claims against the company. The supplier can submit details of what it is owed to the liquidator and may receive a distribution if sufficient assets are available.
Contract terms can still affect what belongs to the company. A valid retention of title clause may mean that particular goods held by the company still belong to the supplier because ownership was due to pass only after payment. Anderson Brookes’ guidance on retention of title explains how these claims are assessed in liquidation.
Directors should not return, hide, move or sell goods subject to a disputed ownership claim without taking advice. The liquidator will need to establish which assets genuinely belong to the company.
What Happens to Customer Contracts?
Customer contracts need to be considered from the opposite direction because the insolvent company may itself have promised to supply goods or complete work.
Where work is unfinished, the company may have received a deposit, bought materials or partly performed the contract before insolvency became unavoidable. Whether completing the work is appropriate depends on factors such as the additional cost, the value preserved for creditors and whether the company can meet the remaining commitment without making its financial position worse.
Our guidance on whether to finish a job or stop trading before liquidation looks at this decision in more detail. Continuing can sometimes protect value, but directors should be cautious about accepting new orders, new credit or further customer payments when the company may not be able to deliver.
If a customer has paid for goods or services that the company can no longer provide, they may have a claim in the liquidation for the resulting loss or refund due.
What Happens to Money Customers Still Owe the Company?
Money owed to the company remains important even where the business has stopped trading. Outstanding invoices are generally company assets. If work has been completed and payment remains due, the liquidator can review the sales ledger, contractual terms and any customer disputes before deciding what can realistically be collected.
The amount shown on an invoice is not necessarily the amount that will ultimately be recovered. A customer may dispute whether the work was completed correctly, exercise a valid contractual right or be unable to pay. Even so, collectible unpaid invoices in liquidation can contribute towards liquidation costs and creditor returns.
Directors should therefore give the insolvency practitioner a clear debtor ledger, copies of relevant contracts and details of any disputes rather than simply treating outstanding invoices as lost income.
Can the Liquidator Continue a Contract?
A liquidator may sometimes allow contractual activity to continue where doing so helps to wind up the company more effectively. This might involve completing a transaction, protecting the value of a particular asset or preserving something that can be sold.
That is different from continuing normal trading indefinitely. Most CVLs involve bringing trading activity to an end, and the decision about what should continue passes to the liquidator once appointed.
Directors who believe a particular contract has substantial value should flag it before liquidation. A valuable order book, customer agreement or contractual right should not be abandoned simply because the company is insolvent.
Can a Liquidator Disclaim an Unprofitable Contract?
For companies being wound up in England and Wales, a liquidator has a statutory power to disclaim certain onerous property.
Section 178 of the Insolvency Act 1986 specifically includes an unprofitable contract within the definition of onerous property. A disclaimer can bring the company’s rights, interests and liabilities in respect of that property to an end from the date it takes effect.
A disclaimer does not mean the other contracting party simply loses any resulting claim. Someone who suffers loss or damage because of the disclaimer can generally prove for that loss in the winding up as a creditor.
An unprofitable contract may not have to remain in place
Where an agreement creates an ongoing burden for the company, the liquidator may be able to disclaim it as onerous property.
The effect and consequences will depend on the agreement, so directors should avoid attempting to cancel or transfer contracts themselves simply because liquidation is approaching.
What Happens to a Commercial Lease?
A commercial lease can continue to create liabilities even after normal trading has stopped. Rent already owed before liquidation may form part of the landlord’s creditor claim, while the liquidator will consider whether the premises or lease have any continuing value.
Leasehold property can also fall within the liquidator’s disclaimer powers, although additional rules apply when a lease is disclaimed. Rather than duplicating those details here, our guide to commercial leases during a CVL covers rent arrears, disclaimer and landlord claims in more depth.
Directors should keep the lease, rent statements and details of any deposit or personal guarantee available when discussing liquidation.
What Happens to Hire Purchase, Vehicles and Equipment Agreements?
Contracts involving vehicles and equipment need to be considered alongside ownership.
A company may use machinery, vans or other assets without owning them outright. Hire purchase, leasing and asset finance terms can determine what equity the company has, whether payments are outstanding and what rights the finance provider has when insolvency occurs.
The liquidator will establish what belongs to the company and what belongs to the finance provider before deciding how the asset should be handled. Our guide to company vehicles and equipment in liquidation explains this distinction in more detail.
Can Company Contracts Be Transferred to a New Business?
A contract does not automatically move to another company because the same director intends to continue trading elsewhere. Some contracts can be assigned, while others need the customer’s, supplier’s, landlord’s or other contracting party’s agreement before they can be transferred or novated. The contract terms need to be checked before any change is made.
This becomes particularly important where a contract or customer relationship has commercial value. Moving valuable work from an insolvent business to another company for little or no consideration can reduce the assets available to creditors and may be examined during the liquidation.
Don't move contracts or customer work without advice
Orders, contracts and customer relationships may have value even where the company itself cannot continue.
If another business is going to take over work, contracts or assets, establish the correct process first. Transferring value away from an insolvent company without proper consideration can create additional issues for directors.
What if the Contract Has a Personal Guarantee?
A company contract and a director’s personal guarantee are separate obligations. Liquidation may deal with the company’s liability under an agreement, but that does not automatically cancel a valid guarantee given by a director.
Guarantees commonly appear in supplier credit arrangements, leases, business lending and vehicle or asset finance. Where a guarantee has been signed, the creditor may be able to pursue the director personally for an unpaid amount covered by its terms. Our guide to personal guarantees after liquidation explains how that exposure can continue after the company’s formal insolvency.
Directors considering liquidation should therefore identify guarantees alongside the company’s contractual liabilities rather than treating them as part of the same debt.
What Should Directors Do With Contracts Before a CVL?
A clear list of contractual commitments can help the insolvency practitioner understand what still needs to be dealt with.
List the company's ongoing contracts
Include significant customers, suppliers, landlords, finance providers, software providers and other recurring service agreements.
Find the contractual terms
Locate signed agreements, terms and conditions, variations and relevant correspondence wherever possible.
Record outstanding money
Separate amounts the company owes from invoices and contractual payments still due to the company.
Identify unfinished work and customer payments
Record what customers have ordered, how much they have paid and what still needs to be delivered.
List personal guarantees
Identify agreements where a director has separately guaranteed the company's obligations.
Avoid unnecessary new commitments
Do not take on new contractual obligations if the company is unlikely to be able to meet them.
Give the information to the insolvency practitioner
The practitioner can then assess which agreements create liabilities, which need immediate attention and whether any contractual rights have value.
Worried about contracts your company can no longer fulfil?
Tell us a little about the company’s debts, trading position and current commitments. Anderson Brookes can help you understand what needs to happen before liquidation.
Company Contracts and Liquidation FAQs
Do all contracts end when a company goes into liquidation?
No. The effect of liquidation depends on the type of contract, its terms and the insolvency rules that apply. Some agreements may end, while others can remain in force or require specific action from the liquidator.
Can a supplier stop supplying as soon as the company enters liquidation?
Not always. Section 233B restricts certain termination rights in contracts for supplying goods or services to a company solely because it enters liquidation. Exceptions apply, and suppliers may still have other rights depending on what happens after liquidation.
What happens if my company cannot complete customer work?
A customer may become a creditor for amounts owed or losses resulting from non-performance. Directors should be particularly careful about taking further deposits or accepting new work when the company may not be able to complete it.
What happens to unpaid supplier invoices?
Unpaid invoices normally become creditor claims in the liquidation. A supplier may have additional rights where goods are subject to a valid retention of title clause.
Can the liquidator cancel an unprofitable contract?
A liquidator winding up a company in England and Wales can potentially disclaim an unprofitable contract as onerous property under section 178 of the Insolvency Act 1986.
Can I move customer contracts into a new company?
Not automatically. Some agreements restrict assignment or require the other party’s consent, and valuable contracts should not simply be diverted away from an insolvent company without proper consideration.
Does liquidation cancel a personal guarantee linked to a contract?
No. A valid personal guarantee is separate from the company’s contractual liability and can remain enforceable against the individual who signed it.
Get Advice Before Making Changes to Company Contracts
Existing contracts can affect customers, suppliers, assets and the amount ultimately available to creditors when a business enters liquidation. Cancelling agreements, transferring work elsewhere or continuing to accept orders without understanding the company’s position can make an already difficult situation more complicated.
At Anderson Brookes, we can review the company’s debts, ongoing commitments and wider financial position and explain what directors should do before entering a Creditors’ Voluntary Liquidation.
If your company has contracts it may no longer be able to fulfil, speak to us before making major changes. Call Anderson Brookes on 0800 1804 935 for free, confidential initial advice.