Is it possible to continue trading in liquidation?
It’s your statutory duty to cease trading if your company is insolvent, and therefore, enters company liquidation - a formal company closure route. If you continue trading, you could be severely reprimanded as you must do all in your power to maximise creditor returns and protect creditors from further losses.
When corporate financial distress is so severe that the decline cannot be reversed and the business is unable to continue, insolvent liquidation is the only option. This is a formal process that results in permanent closure.
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.
So why can’t a company continue to trade under these circumstances?
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Why a company in liquidation cannot trade
The laws of insolvency in the UK are in place to protect creditors from unnecessary financial losses, 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 circumstances, there’s a strong possibility that creditors would incur further losses. So if insolvency describes the financial position of a business, liquidation is an outcome – an official insolvency procedure that means directors lose control of their business.
What happens during company liquidation?
A company in liquidation appoints a liquidator to administer the process. This involves gathering in all monies owed to the business, selling any assets at auction, and distributing the proceeds among creditors in the statutory order.
If the completion of an existing contract could increase returns for creditors, this is one instance where very restricted trade may be instigated by the liquidator, and carried out under their supervision with that sole purpose in mind.
The liquidator acts in the best interests of company creditors during liquidation, and must also report on the conduct of directors leading up the company’s failure. This is to better understand what led to the insolvency, and ensure that no misconduct or wrongful trading took place.
Trading in liquidation vs trading whilst insolvent
As we’ve mentioned, in rare cases the liquidator may carry out very restricted trade for a specific reason. 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.
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 circumstances. This is why it’s so important to obtain professional insolvency guidance when cash flow is poor, and preferably before the business slips into insolvency.
Once the company has been put into liquidation it’s too late to take any form of aversive action, so the earlier that advice is sought, the more options may be available to help the business recover.
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You can fulfil your legal obligations via a CVL
By placing your company into Creditors’ Voluntary Liquidation, or CVL, you put your creditors’ interests above those of the company and its shareholders, which is your legal obligation as a director.
As there are no rescue options it means the business is experiencing acute and irreversible financial distress, placing creditors at significant risk of further financial loss if you carried on trading.
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 an extensive network of offices around the country, which means you’re never far away from professional help.
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