Can a company continue to trade when it is in liquidation?

What happens in company liquidation and can I continue trading?

The majority of companies that are struggling financially can be saved via a rescue plan. However, it’s also the case that some businesses have insurmountable debts and are no longer commercially viable. In that situation, insolvent liquidation is the only option.

Liquidation is the formal process that brings a company to an end. The liquidator sells its assets and uses the proceeds to pay the company’s creditors (the parties it owes money to) as far as possible. They then remove the company from the official register and any remaining debts are written off. 

You can enter into liquidation voluntarily or it can be forced on the company by a creditor. Regardless of how you enter liquidation, you must cease trading as soon as you know the company is insolvent and for the duration of the procedure.  

Can I continue trading when my company is in liquidation?

The simple answer is no. You should cease trading as soon as you know the company can no longer pay its debts when they are due or its liabilities outweigh the value of its assets. At that point, the company is said to be insolvent and you are legally required to cease trading to protect your creditors from unnecessary losses.  

You should also seek the advice of a licensed Insolvency Practitioner. They will assess the business and discuss your options with you. If the company cannot be saved, they will usually recommend you liquidate it voluntarily via a Creditors’ Voluntary Liquidation (CVL). 

A liquidator will take control of the company to repay the creditors and wind down its affairs. Although you cannot trade the company during the liquidation process, in rare cases, the liquidator may allow certain contracts to continue to boost the return for the creditors.  

Why can I not trade during liquidation?

When a company enters insolvent liquidation, it’s because it’s no longer commercially viable and cannot pay its debts. If you were allowed to continue trading under these circumstances, the company could accrue further debts it cannot pay and worsen the financial position of its creditors. 

As part of the liquidation process, the company’s assets are sold to raise money to repay its creditors. However, by definition, the fact that the company is insolvent means there isn’t enough money to repay all the creditors in full. The result is that unsecured creditors, such as trade suppliers, customers, landlords and HMRC, often receive little or none of the money they are owed. If companies in liquidation were allowed to trade, it risks creating further debts the unsecured creditors would have to write off. 

Trading in liquidation also increases the risk of fraud. For example, directors would have the opportunity to transfer assets away from the company. Making it a legal requirement to cease trading in liquidation protects the public and makes fraud more difficult to execute.    

Are there any circumstances when you can trade in liquidation?

There are no circumstances where the directors can continue trading in liquidation. However, there are rare cases where the Insolvency Practitioner acting as the liquidator can carry out restricted trade. For example, the liquidator may allow the company to complete a contract so they can collect payment from the customer and boost the creditors’ return. 

What happens if you trade in liquidation?

If you continue to trade when the company is insolvent or in liquidation, you could be accused of wrongful trading. That is because you have failed to protect the company’s creditors and put your interests ahead of theirs. The penalties for wrongful trading include fines, personal liability for company debts and being disqualified from acting as a company director for up to 15 years. 

Should I liquidate my company?

That depends on its financial situation. There are several informal and formal business rescue procedures you can use to turn around a struggling company. However, there comes a point where a business has no realistic prospect of making a recovery and is no longer commercially viable. At that point, liquidation is in everyone’s best interests.  

Liquidating the company voluntarily via a Creditors’ Voluntary Liquidation (CVL) will fulfil your legal obligation to protect your creditors’ interests and bring an efficient and orderly end to your company. 

A CVL gives the directors more control over the process as you can appoint your chosen licensed Insolvency Practitioner to act as the liquidator. You may also be able to claim director’s redundancy pay. Perhaps the biggest benefit, however, is that by taking control of the situation, you reduce the risk of accusations of improper practice and the severe consequences they can bring. 

Need advice?

At Begbies Traynor, we know that choosing to liquidate your business is never easy, particularly when you’ve put your heart and soul into it, but sometimes it’s the best thing you can do. If your business is no longer profitable and you’re ready to move on to something new, we can guide you through the process and protect your interests at the same time. Get in touch for a free consultation or arrange a meeting at one of our 100+ UK offices.