Can-a-company-in-liquidation-still-trade

Is it possible to continue trading in liquidation?

It’s legally required to stop trading if your company becomes insolvent, leading to company liquidation, a formal closure process. Continuing to trade could lead to serious consequences as you’re obligated to maximise creditor returns and shield them from additional losses.

 

Can I continue to trade while my company in liquidation?

When corporate financial distress becomes too severe to reverse, and the business can’t continue, insolvent liquidation becomes the sole choice. It’s a formal process that leads to permanent closure.

In certain instances, directors may choose to voluntarily place their company into liquidation based on advice from a licensed professional. This process is known as Creditors’ Voluntary Liquidation (CVL). 

Alternatively, a creditor might compel the business to liquidate through a winding-up petition, leading to compulsory liquidation.

 

Why can’t a company trade during liquidation? 

The insolvency laws in the UK exist to shield creditors from avoidable financial losses and to protect the public from dishonest directors who intentionally attempt to deceive.

It is a legal obligation to stop trading when a business is no longer solvent, meaning it cannot settle its bills on time or when it has acquired too many liabilities that surpass the worth of its assets.

If a company continues to trade under such circumstances, creditors might face additional losses. Therefore, when a business is in an insolvent state, liquidation becomes an inevitable outcome – an official insolvency procedure resulting in directors losing control of their business.

 

What happens when a company is in liquidation?

A company undergoing liquidation appoints a liquidator to oversee the process. This includes collecting all debts owed to the business, auctioning off any assets, and distributing the proceeds among creditors according to statutory priorities.

If fulfilling an existing contract could enhance returns for creditors, the liquidator may initiate limited trading under strict supervision, solely aimed at achieving this objective.

The liquidator acts in the best interests of company creditors during liquidation and must also report on the directors’ conduct preceding the company’s failure. This aims to understand the causes of insolvency and to prevent any misconduct or wrongful trading.

Discover more about the process in our article, where we detail the expenses involved in liquidating a limited company. 

 

Unlocking the differences between trading in liquidation vs trading whilst insolvent

As previously mentioned, in rare instances, the liquidator may conduct highly restricted trading for a particular purpose. However, directors cannot engage in trading when their company is in liquidation. 

This is primarily because it violates insolvency laws, and control is removed from their hands.

The directors might have traded the company while it was insolvent, which could prompt further investigations by the Insolvency Service. Wrongful trading represents a significant violation of director duties that can swiftly escalate losses for creditors.

 

What is the company director’s legal duty to creditors?

When a company becomes insolvent, directors are legally obligated to cease acting in the company’s best interests and focus on prioritising the interests of creditors. 

If creditors incur further losses due to wrongful trading, directors may face personal liability and potential sanctions.

Directors can face disqualification for up to 15 years based on the circumstances. This underscores the importance of seeking professional insolvency advice when facing cash flow challenges, ideally before the business reaches insolvency.

Once the company enters liquidation, it becomes too late to take any preventive action, so seeking advice earlier allows for more available options to aid the business in its recovery.

 

Can you fulfil your legal obligations via a CVL? 

By initiating Creditors’ Voluntary Liquidation (CVL) for your company, you prioritise your creditors’ interests over those of the company and its shareholders, fulfilling your legal obligation as a director.

When there are no rescue options available, it signifies that the business is facing acute and irreversible financial distress. Continuing to trade under such circumstances poses a significant risk of further financial loss to creditors.

For further details and independent professional advice, please contact Vanguard Insolvency to schedule a complimentary, same-day consultation.

We specialise in company rescue and recovery and maintain an extensive network of offices nationwide, ensuring you’re never far from professional assistance.

 

Can I stop compulsory liquidation?

Before your company is compelled into compulsory liquidation, you will receive a Winding Up Petition (WUP). This legal notice signifies the creditor’s intention to have your company forcibly wound up by court order.

Receiving a WUP doesn’t mean all hope is lost, but time is critical. You have just 7 days to respond, or your company is likely to be wound up. During this period, you can dispute the WUP if you believe it’s unjustified, negotiate a repayment plan with the creditor, settle the debt in full, or explore alternative insolvency procedures that may be more suitable for your company. 

Upon receiving a WUP, it’s crucial to seek advice from a licensed insolvency practitioner promptly. The sooner you seek advice, the higher the likelihood of preventing the compulsory liquidation of your company.

 

Why is my company facing compulsory liquidation?

Compulsory liquidation occurs when a creditor petitions the courts to wind up your company and remove it from the Companies House register. This usually follows a lengthy process by the creditor to recover the money owed by your company. 

When a company undergoes liquidation, whether voluntary or compulsory, all its assets are sold, and the proceeds are distributed to creditors to settle the company’s debts. By initiating compulsory liquidation, creditors aim to recover the outstanding debt owed to them through the liquidation of assets.

 

What can we choose instead of compulsory liquidation?

Compulsory liquidation occurs when a company is compelled into liquidation against its wishes. However, distressed businesses have alternative insolvency solutions that offer directors more control over the process. If you anticipate that liquidation is the inevitable outcome for your company, you can opt for this process voluntarily through a Creditors’ Voluntary Liquidation (CVL).  

By initiating the process, you have the authority to appoint an insolvency practitioner of your choice and retain some control over the timing of the liquidation.

Alternatively, considering administration or a Company Voluntary Arrangement (CVA) to restructure the company and safeguard its viable aspects can help preserve parts or the entirety of the business from liquidation. It’s advisable to explore this option before a creditor issues a WUP.

 

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What can occur after compulsory liquidation?

When a company undergoes liquidation, whether voluntarily or through compulsory means, it ceases to exist as a legal entity. All trading activities must halt, assets are identified and sold, and the proceeds are used to repay creditors to the fullest extent possible before the company’s name is struck off the Companies House register.

As part of the process, any staff members will be made redundant. Following compulsory liquidation, former directors may typically start a new company as long as they haven’t been disqualified from acting as directors. 

However, strict regulations regarding ‘phoenixism’, which pertains to the reuse of a company’s name, must be followed. A licensed insolvency practitioner can provide the necessary guidance on this matter.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.