Is it possible to continue trading in liquidation?
A company will cease trading immediately upon entering a company liquidation process. In many cases, you will be required to stop all trade once you know your company to be insolvent. If you continue trading while insolvent you could be severely reprimanded as you must do all in your power to maximise creditor returns and protect creditors from further losses at this time.
Can I continue to trade while in liquidation?
Why a company in liquidation cannot trade
What happens during company liquidation?
Trading in liquidation vs trading whilst insolvent
A company director’s legal duty to creditors
You can fulfil your legal obligations via a CVL
Can I continue to trade while in liquidation?
Whena company'sfinancialproblems areso severe that the decline cannot be reversed and the business is unable to continue, insolvent liquidationmay be the only option. This is a formal process that results in permanent closure of an insolvent business.
In some cases the directors will voluntarily place their company into liquidation following guidance from a licensed professional – a process known as Creditors’ Voluntary Liquidation (CVL). In others, a creditor may force the business to liquidate via a winding‐up petition – compulsory liquidation.
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Why a company in liquidation cannot trade
The laws of insolvency in the UK are in place to protect creditors fromsuffering additional financial losses in the event of insolvency and to safeguard the general public from unscrupulous directors who deliberately seek to defraud.
It’s a statutory requirement to cease trading when a business is no longer solvent – when it cannot pay its bills as they fall due, or when the business has taken on excessive liabilities that outweigh the value of its assets.
If a company did carry on in trade under these circ*mstances, there’s a strong possibility that creditors would incur further losses. A company director could find themselves being held personally responsible for these losses if they occurred due to trade continuing after the company was knowingly insolvent.
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Trading in liquidation vs trading whilst insolvent
When a company enters liquidation, the insolvency practitioner immediately assumes control of the company. There are rare cases where the appointed liquidator may carry out very restricted trade even when the company is known to be insolvent. This may be completing an ongoing job in order to receive payment which would benefit the body of creditors as a whole.
It isn’t possible for directors to trade when their company is in liquidation, however, as apart from the primary reason of contravening insolvency laws, control is taken out of their hands when an insolvency practitioner is appointed.
The directors may have traded the company when it was insolvent, however, which could be cause for further investigations by the Insolvency Service. Wrongful trading is a serious breach of director duties that can quickly lead to increased losses for creditors.
A company director’s legal duty to creditors
When a company enters insolvency, by law directors must stop acting in the best interests of the company and prioritise their creditors’ interests. If creditors suffer additional losses because of wrongful trading, it could result in personal liability for the directors, and possibly other sanctions.
Directors can be disqualified for up to 15 years depending on the circ*mstances. This is why it’s so important to obtain professional insolvency guidance when cash flow is poor, and preferably before the business slips into an insolvent position.
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By seeking the advice of a licensed insolvency practitioner and placing your company into Creditors’ Voluntary Liquidation, you demonstrate your desire to put your creditors’ interests above those of the company and its shareholders, thereby adhering to your legal duties as the director of an insolvent limited company.
For more information and independent professional advice, please get in touch with Real Business Rescue to arrange a free, same‐day consultation. We specialise in company rescue and recovery, and operate from an extensive network of offices around the country, which means you’re never far away from professional help.
Why is my company being compulsorily liquidated?
Compulsory liquidation happens when a creditor petitions the courts to have your company wound up and removed from the Companies House register. This is often the final step of a lengthy process by the creditor to collect the money your company owes. When a company is liquidated – either voluntarily or compulsorily – all its assets are sold with the proceeds then being distributed to outstanding creditors to pay back the debts of the company. By forcing your company into compulsory liquidation, creditors hope to then be able to collect the outstanding debt owed to them when the assets are liquidated.
Can I stop compulsory liquidation?
Prior to your company being forced into compulsory liquidation, you will be served with a Winding Up Petition (WUP). This is a legal notice which declares the creditors intention to have your company forcibly wound up by order of the courts. If you receive a WUP, all is not lost, however, time is very much of the essence. You have just 7 days to act otherwise your company will almost certainly be wound up. During these 7 days you can lodge a dispute if you feel the WUP is unwarranted, negotiate with the creditor to come to a mutually agreeable repayment plan, pay off the creditor in full, or else explore whether there are any alternative insolvency procedures which may better suit your company. You should take advice from a licensed insolvency practitioner immediately upon receiving a WUP; the sooner this advice is sought, the better the chance of preventing your company being compulsorily liquidated.
What are the alternatives to compulsory liquidation?
Compulsory liquidation is when a company is forced into liquidation against its will; however, there are alternative insolvency solutions for distressed businesses which give its directors more control over the process. If you know liquidation is the only likely outcome for your company, you can enter into this process voluntarily by way of a Creditors’ Voluntary Liquidation (CVL). By initiating the process, you have the ability to appoint an insolvency practitioner of your choosing and some control over when the liquidation takes place.
Alternatively, exploring the possibility of administration or a Company Voluntary Arrangement (CVA) to restructure the company and protect its viable elements, can help to save parts (or the whole) of the business rather than being liquidated. This option is best explored before a WUP has been issued by a creditor.
What happens after compulsory liquidation?
When a company is liquidated – whether voluntarily or through compulsory liquidation – it ceases to exist as a legal entity. All trading must stop, assets will be identified and sold, all proceeds used to repay creditors as much as possible, before the company’s name is removed from the Companies House register. Any staff will be made redundant as part of the process. It is often possible for the former directors to be able to start a new company following compulsory liquidation so long as they have not been disqualified from acting as a director. If this is done, strict rules regarding ‘phoenixism’ which refers to the reuse of a company’s name, must be adhered to. A licensed insolvency practitioner will be able to give you the advice you need on this.
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