Multiple sources have confirmed to MailOnline that the singer was axed by the record label.
A source said: 'Liam's advance was massive and he didn't recoup [it].
'Out of all of the One Direction boys, Liam was on the wrong path musically.'
It is understood that the release of his second album was put on hold prior to Universal dropping him.
Meanwhile, it can also be revealed that Liam's PR resigned earlier this month, which left him without any publicity representation.
The resignation came as Liam's ex-fiancé Maya Henry began legal proceedings against the singer after accusing him of repeatedly contacting her.
One source said: 'It is like all of Liam's music career that he had built up since he went solo eight years ago was crumbling, there was very little left for him.
'It must have absolutely devastated him.'"