Can a Company Continue to Trade When in Liquidation?

July 8, 2022 / Business Insolvency

“Can a liquidated company still trade?” This question is asked by more and more business owners as the UK economy faces new challenges every day.

For the uninitiated, liquidation refers to the process of converting business assets into cash in order to pay outstanding debts. It often takes place when a company is too financially distressed to continue trading – and can be voluntary or ordered by the authorities. However, a business owner might also decide to wind up their company due to retirement or concern about a company’s future.

In any case, the end result of the liquidation process is the closing down of the company, which is also struck from the Companies House register. But can a company continue to trade from the day it enters liquidation until the date when it is finally struck from the Government register?

Can a company trade in liquidation?

The short and sweet answer to this question is no, it cannot. Once the decision has been made to force a business into liquidation there is very little to no way back for the company and its directors. Directors should cease trading immediately, although there may be some special exceptions where the completion of contracts can aid the collection of debts from the company. But absolutely no further credit should be taken in this circumstance.

Why is this the case? The simple explanation is that the UK has a series of insolvency laws in place to protect creditors from added financial losses. Preventing businesses from trading once they have entered liquidation also reduces the chances of company directors committing fraud. If a company is no longer solvent, it’s a legal requirement for it to stop trading. When a business becomes insolvent, its directors are legally bound to put the interests of creditors first.

There are rare cases where a company’s appointed liquidator is allowed to carry out very restricted trade. However, it is important to remember that the liquidator is acting in the best interests of the creditors and not of the company. When an appointed liquidator resumes trading, it is usually because there is a guarantee that trading can maximise a company’s assets before they are liquidated and transformed into cash to be paid to its debtors.

So, the answer is quite straightforward. To avoid further troubles, simply stop trading if your company is insolvent or entering liquidation. In some rare cases there may be an exception, but you must first consult a professional practitioner to see if this is applicable.

Under no other circumstance can a company continue to trade when in liquidation. At least under the law. But what happens if you break it?

Also Read: Can You Still Be a Direct After Liquidation?

What can happen if I trade while in liquidation?

If you continue trading after your company enters liquidation, you could face severe legal consequences. Why? It’s all in the Insolvency Act 1986. Not complying with this Act could result in personal liability under civil and criminal law, so you should read it carefully before you take any further action. There are several provisions that any registered director should know like the palm of their hand.

One of these provisions is Section 214, which is concerned with what we call Wrongful Trading. In a nutshell, Wrongful Trading is a civil offence that occurs when company directors fail to minimise losses to company creditors. If you allow your business to trade past the point of insolvency, you are committing Wrongful Trading can be held personally liable for company debt.

Directors who decide to trade during liquidation can risk hefty penalties. For instance, they might be disqualified from directing a company for up to 15 years. There is also a great risk of directors and company owners being held personally liable for their company’s debt.

Is trading in liquidation the same as trading whilst insolvent?

Not quite. The main objective of a liquidation order is to close a business down and cease all trading across the board. Companies aren’t usually given the opportunity to continue trading at this stage anyway, as a licensed practitioner will take over proceedings as the company is wound up. But what about trading before the company is liquidated?

It is a common misconception that a business entering liquidation must necessarily be insolvent. Being insolvent is different to liquidation – insolvency is a state whereas liquidation is a resolution. When a company is insolvent it means it is unable to pay the debt it owes. This is the first step towards possible liquidation. In this state, there are a number of options available to rescue the situation. If none of these are feasible or applicable, then liquidation will occur, and the company will be shut down.

When a company is insolvent directors must adhere to certain requirements and legal duties. All of which act in the best interest of the company’s creditors. The company must cease trading in this case as not doing so will be deemed as wrongful and improper. If the appointed liquidator uncovers signs of wrongful trading in their investigation into a company, directors will be prosecuted. This could result in a ban from directing a limited company for up to 15 years.

As you might have figured out by now, liquidating a company doesn’t come without its share of financial risks. But that doesn’t mean you shouldn’t consider it.

Should I liquidate my company?

If your company is struggling to make ends meet, liquidating it might be your best way forward. Without a doubt, managing mounting debt is the most stressful thing that can happen to a company director. And it’s not just a matter of stress. When it comes to debt management, not complying with the law can result in personal consequences that could chase you for the rest of your life.

It’s no wonder that the main reason why directors liquidate their insolvent companies is to get rid of debt. Once the company has been dissolved and the funds produced by the sale of its assets distributed to creditors, any outstanding debts will be written off. That means there will be no more repayments and constant chasing under the threat of legal action.

If you’re thinking about liquidating your company, the best course of action is often to enter a Creditors’ Voluntary Liquidation (CVL). When entering a CVL, a licensed insolvency practitioner (IP) will be appointed to take care of the company. Your IP will bring the company to a close and help your creditors to recover as much money as possible by maximising your realisable assets. Apart from saving you from legal trouble, making your creditors happy will keep your reputation intact. In turn making it easier to start over again.

There are many reasons why CVLs are the most common type of liquidation in the UK. To start with, they involve lower costs than other insolvency procedures. With a CVL, directors benefit from more control during the winding down process. In fact, they can even claim redundancy as a director. Those economic benefits are paired with some valuable legal ones, as directors can also avoid any accusations of wrongful trading or improper practices.

Finding the best way forward, together

At Clarke Bell, we understand that deciding to wind down your own company can be difficult. Especially when you’ve put your heart and soul into it. But in business, as in life, learning when to cut your losses can be crucial.

If your company is stopping you from moving on with your life, give us a call. As licensed, professional insolvency practitioners, we can help you find the best way forward.

Contact us today for more information or browse our site for further business insolvency advice.