How to Liquidate a Construction Company

Financial pressure does not automatically mean a construction business must close. 

A temporary cash-flow shortage may be manageable if the company remains profitable and has a realistic prospect of collecting outstanding payments. Liquidation becomes more likely where the business is insolvent and there is no credible way to recover. 

Warning signs can include: 

• VAT, PAYE, Corporation Tax or CIS payments falling behind; 
• subcontractors or suppliers refusing further credit; 
• wages or finance payments being missed; 
• retentions and disputed valuations leaving the company without working capital; 
• new projects being used to fund losses on earlier contracts; 
• personal borrowing being used repeatedly to support the company; 
• County Court Judgments, statutory demands or winding-up threats; 
• the company being unable to complete its existing contracts; or 
• liabilities exceeding the realistic value of company assets. 

Where insolvency is suspected, directors should consider the interests of creditors and avoid decisions that unnecessarily worsen their position. Our guide to director duties when facing insolvency explains these responsibilities in more detail. 

The first step is to establish whether the company is genuinely insolvent and whether any rescue option remains realistic. 

This review should include: 

• money held in company accounts; 
• unpaid invoices and applications for payment;
• retentions due now or in the future; 
• work in progress; 
• plant, vehicles, materials and other assets; 
• hire-purchase, lease and asset-finance agreements; amounts owed to
• HMRC; 
• employee and subcontractor liabilities; 
• secured borrowing and personal guarantees; 
• customer deposits and incomplete work; and 
• disputed claims, defects or potential contractual deductions. 

Outstanding invoices and retentions should not automatically be treated as cash that will be received in full. Their recoverability may depend on the contract, the quality and completion of the work, counterclaims and rights of set-off. 

If liquidation is likely, directors should preserve: 

• accounting and bookkeeping records; 
• bank statements; 
• CIS and payroll records; 
• contracts and subcontractor agreements; #
• applications for payment and payment notices; 
• retention schedules; 
• plant and vehicle finance documents; 
• employee information; 
• insurance records; 
• asset registers; and 
• details of current and incomplete projects. 

Company property should not be transferred, hidden or sold informally. Directors should also avoid returning plant, vehicles or materials without first confirming who owns them and whether the company has any financial interest in them. 

This may include: 

• unpaid invoices; 
• applications for payment; 
• certified sums; 
• retentions; 
• compensation claims; and 
• amounts due for work completed before liquidation. 

Recovery is not guaranteed. Customers or main contractors may raise defects, contra-charges, completion costs or contractual rights of set-off. 

Directors should preserve all evidence supporting the company’s entitlement to payment, including contracts, variations, valuations, timesheets, delivery records, site photographs and correspondence. 

The liquidator can then determine whether pursuing the debt is likely to benefit creditors. 

Assets owned outright by the company will normally be valued and may be sold by the liquidator. 

This can include: 

• vehicles; 
• tools; 
• machinery; 
• scaffolding; 
• unused materials; 
• office equipment; and 
• property owned by the company. 

Equipment subject to hire purchase, leasing or asset finance may belong to the finance provider. The relevant agreement must be checked before anything is moved, returned or sold. 

Tools personally owned by a director or employee are not automatically company assets, but evidence of ownership may be needed where the position is unclear. 

Materials located on a customer’s site can be more complicated. Ownership may depend on the contract, whether they have been paid for and whether title has passed. 

Under CIS, contractors deduct money from certain payments to subcontractors and pass it to HMRC. Qualifying CIS deductions owed when a company enters formal insolvency can rank as secondary preferential HMRC debt. GOV.UK 

This affects HMRC’s priority for distributions from available assets. It does not mean the director automatically becomes personally responsible for the debt. 

Personal exposure can arise separately where there is: 

• a personal guarantee; 
• an overdrawn director’s loan account; 
• misuse of company funds or assets; 
• fraudulent or wrongful conduct; 
• a valid HMRC Joint and Several Liability Notice; or 
• another specific legal basis for personal liability. 

Our construction company liquidation with HMRC debt case study shows how one construction business dealt with significant tax and supplier arrears through CVL. 

A limited company is a separate legal entity, so its debts do not normally become the director’s personal debts simply because it enters liquidation. 

However, directors should check for: 

• personal guarantees on loans, trade accounts or equipment finance; 
• overdrawn director’s loan accounts; 
• assets transferred for less than their proper value; 
• payments that placed one creditor in a better position than others; 
• dividends paid without sufficient distributable profits; and 
• continued trading that caused avoidable losses to creditors. 

The liquidator is required to review the company’s affairs and the conduct of its directors. 

Liquidation does not automatically prevent someone from becoming a director again. However, restrictions apply to using the same or a sufficiently similar business name for five years following insolvent liquidation unless a statutory exception applies or court permission is obtained. GOV.UK 

Take advice before setting up or becoming involved in another construction business using a similar name.