This guide is maintained as a current resource for July 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
A comprehensive guide to handling outstanding contracts when a company enters liquidation in England and Wales. Learn how contracts are treated, the liquidator's powers to adopt or disclaim agreements, the impact of insolvency law on termination rights, creditor claims for losses and practical steps for contract parties to protect their interests.
Contracts and Company Liquidation
When a company in England and Wales enters liquidation, it enters a formal insolvency process under the Insolvency Act 1986 aimed at winding up its affairs, realising assets and distributing the proceeds to creditors. A common and complex issue in liquidation is the status of outstanding contracts - agreements the company has entered into but not fully performed when the liquidator is appointed. Contracts do not automatically end on liquidation; instead, the appointed liquidator must decide how to deal with each one. This guide explains how contracts are treated in liquidation, the rights of third parties, what obligations continue, and the practical steps parties should consider to protect their interests.
What Happens to Contracts When Liquidation Begins
No Automatic Termination on Insolvency
Contracts entered into by a company do not automatically terminate simply because the company enters liquidation. Instead, the liquidator must decide whether to adopt (continue), disclaim (reject), or terminate each contract, depending on its nature and value to the estate.
Where a contract continues, the liquidator may honour obligations if doing so will assist realising value for creditors - for example by completing works that allow asset sales or maximise recoveries. However, if a contract is onerous or burdensome, the liquidator can disclaim the contract, effectively ending the company's obligations under it.
Liquidator's Powers: Disclaiming Onerous Contracts
Understanding Disclaimer Powers
A key statutory power available to liquidators is the ability to disclaim onerous property, including certain contracts and leases, under section 178 of the Insolvency Act 1986. Onerous contracts are agreements that:
- provide little or no benefit to the company;
- impose ongoing liabilities or losses; or
- hinder the liquidator's ability to maximise the estate for creditors.
Once a contract is disclaimed:
- the company is no longer bound by its terms from the date of disclaimer;
- the counterparty cannot insist on performance;
- the counterparty may file a claim for damages or losses as an unsecured creditor in the liquidation; and
- rights that existed solely because of the contract (such as ongoing supplies or services) cease.
Leases and Property Contracts
Commercial leases and property agreements are a common category of onerous contracts. A liquidator must decide - usually within a statutory period - whether to disclaim such leases. If not disclaimed, the liquidator must usually pay rent and comply with obligations until the lease is terminated properly.
When Contracts Continue in Liquidation
Ongoing Contracts with Value
If a contract is valuable - for instance, a supply agreement that allows the estate to generate income or complete asset sales - the liquidator may choose to continue it. In such cases, the liquidator steps into the company's shoes and becomes responsible for performing the company's obligations. This may include paying for supplies or services rendered during the liquidation.
Supplier Obligations and Insolvency Legislation
Under the Corporate Insolvency and Governance Act 2020 (CIGA), certain contracts for the supply of goods or services cannot be terminated solely because the counterparty has entered insolvency proceedings. This applies to many ongoing commercial agreements and prevents suppliers from using ipso facto clauses that automatically trigger termination on insolvency. Such clauses are rendered ineffective once the insolvency process begins, so long as the contract remains in force and the company continues to pay for supplies rendered after insolvency.
However, a supplier can still rely on other contractual rights - for example, termination for non‑payment of post‑insolvency debts or for material breaches of contract not solely connected to the insolvency event.
Counterparty Rights When a Contract Is Disclaimed or Terminated
Claims as Creditors
If the liquidator disclaims a contract, the counterparty's right to claim losses arises. Such claims generally take the form of unsecured claims in the liquidation, which means recovery is only possible from the remaining assets after secured and preferential creditors are paid. Unsecured creditor recoveries can be limited or nil, depending on the state of the company's estate.
Common Law Remedies
Counterparties may also have common law rights arising from contractual breaches or termination, such as claims for damages where the liquidator elects to treat the contract as repudiated. These claims are likewise dealt with as unsecured claims unless secured by other rights independent of the contract.
Practical Steps for Contract Parties
1. Identify Contractual Exposure Early
If you have an active contract with a company heading into liquidation, identify your rights and obligations promptly. Review the contract for termination clauses, guarantees, security, credit terms and any provisions that might affect your status in insolvency. Such preparation helps position you for claims or negotiations with the liquidator.
2. Communicate with the Liquidator
Once liquidation begins and a liquidator is appointed, counterparties should notify the liquidator of outstanding contracts and obligations. This ensures they are considered when the liquidator assesses which contracts to continue or disclaim.
3. Understand Liability and Guarantees
If you have provided personal guarantees on a contract or lease, insolvency does not automatically release you from personal liability. Counterparties can often pursue personal guarantees even after the company enters liquidation, depending on the terms of the guarantee and applicable law.
4. Consider Contract Novation or Assignment
In liquidation, sometimes contracts can be assigned or novated to another party (for example, a purchaser of the business or assets), with the consent of all contractual parties. Novation transfers both the rights and obligations of the contract to a third party and can preserve continuity where both sides agree.
Time Limits and Procedural Considerations
There is no automatic deadline by statute for liquidators to decide about every contract, but practical and legal considerations mean liquidators generally assess contracts promptly to avoid ongoing liabilities. Counterparties should expect to engage with the liquidator early in the process, lodge claims in the insolvency, and monitor updates on creditor meetings and the liquidator's proposals.
Common Questions About Contracts in Liquidation
Can I terminate a contract just because the company is in liquidation?
No. Due to protections in insolvency law, including CIGA, many contracts, especially for supply of goods or services, cannot be terminated solely because the counterparty is in liquidation. Other contractual rights may, however, allow termination for breach or non‑payment.
What happens if a liquidator disclaims a lease or contract?
The liquidator can disclaim onerous contracts, which frees the company from future performance but allows the counterparty to file an unsecured claim for losses suffered.
Can I assign my contract to another business?
Assignment or novation may be possible with consent and can preserve contractual relationships if a buyer of the company's business agrees to take over obligations.
Key Takeaways
Dealing with outstanding contracts in liquidation requires careful navigation of insolvency law and contractual rights. Contracts do not automatically end when liquidation starts. Instead, the appointed liquidator assesses each agreement, deciding whether to continue performance or disclaim onerous terms under the Insolvency Act 1986. Protections introduced by insolvency legislation now limit suppliers' ability to terminate contracts solely because of a counterparty's insolvency. Counterparties should communicate early with liquidators, understand their rights, and prepare to submit claims where necessary. In complex scenarios, professional advice from solicitors or insolvency practitioners helps safeguard contractual interests and navigate claims effectively.
