Entering liquidation is a common occurrence for companies. While commonly regarded as a solution for insolvent companies, it is a practice that has a much wider range of uses. Directors can use company liquidations to retire, free up funds for a new venture, or even as a means to resolve a dispute between feuding directors with irreconcilable differences.
Despite the frequent use of the practice, and the wide range of applications, it is a process that can be difficult to understand, especially when looked into for the first time. Company liquidation has a lot of moving parts, with many rules governing the various uses and variables. One common point of confusion is whether a company in liquidation still exists, and if it is possible to continue trading during the process.
In this article, Clarke Bell will answer this question, cover what happens during company liquidation, and explain the implications of trading while undergoing liquidation.
What is company liquidation?
Company liquidation is a formal procedure that can be used to close a company. There are three forms of company liquidation: Members’ Voluntary Liquidation (MVL), Creditors’ Voluntary Liquidation (CVL), and compulsory liquidation. Each type of liquidation has its unique features and applications, but each type follows a similar theme; a licensed insolvency practitioner will assess the company, its assets will be liquidated with the proceeds distributed amongst relevant parties, and the company will be closed down.
Also Read: Can a Company Liquidation Be Reversed?
What happens to a company during liquidation?
Companies undergoing liquidation will have insolvency practitioners brought in to take control of the company, which is necessary in order for the liquidation to be carried out. This insolvency practitioner will then dispose of all company assets and empty accounts, with the proceeds going to shareholders or creditors, depending on the form of liquidation used and the needs of the company. At the end of the process, the company will be wound up and removed from the register at Companies House. At this point, the company will effectively cease to exist.
Can a company undergoing liquidation continue trading?
As a company effectively ceases to exist at the end of the liquidation process, it’s easy to think that it can continue trading until it is removed from the Companies House register. However, this is absolutely not the case, and continuing to trade while undergoing liquidation can result in serious consequences for the directors involved. Instead of taking any risks, you should immediately cease all trading once you have decided to put your company into liquidation. You should do so before taking any other action, even including making a formal application to start the process.
While it might seem odd that a company undergoing liquidation cannot continue trading, this rule is in place to protect creditors from risk. Continuing to trade while in liquidation can make for an easy method of shifting company assets out of the company, essentially keeping them out of the reach of creditors and defrauding them of what they are owed. With the legal requirement to immediately cease all trading in almost all cases, attempts at defrauding creditors and the public at large are much more difficult to execute. Equally, any attempts are easier to track, better ensuring unscrupulous directors are brought to justice.
As alluded to previously, the legal requirement to stop trading upon entering liquidation is not absolute. Such cases are exceedingly rare, and any trades made while in liquidation will be carried out by the insolvency practitioner, not company directors or other staff. These trades are conducted with a view to raising as much money as possible for creditors, as repaying liabilities is a liquidator’s main priority. If you are unsure whether your company can continue trading during liquidation, it is imperative that you speak with your insolvency practitioner before taking any action.
What happens if my company continues trading while in liquidation?
Trading while undergoing liquidation is governed by the Insolvency Act 1986. If your company continues trading while not being in the aforementioned exceptional circumstances, it can result in serious legal consequences for you and other directors involved.
By continuing to trade while your company is in liquidation, it is likely that you will be accused of wrongful trading. This offence is applied to company directors that have failed to uphold their obligations to creditors, and have pursued personal gain over maximising returns for the creditors they are legally obliged to repay. If you are found guilty of wrongful trading, you may face a series of penalties depending on how serious your infraction was. Penalties can include the disqualification of your directors’ license for up to 15 years, being barred from holding management positions in current and future companies for the same length of time, fines, personal liability for company debt, and in some cases, even a prison sentence.
Trading while insolvent
Trading while insolvent and trading during liquidation can be a distinction confusing to some directors. As we’ve mentioned, trading during liquidation is almost always unacceptable, and will result in serious consequences for directors that do so regardless. However, trading while insolvent is not as black or white.
Although insolvency is typically the precursor to liquidation, directors aren’t quite so limited in the choice of action. While directors of insolvent companies are expected to cease trading when their company becomes insolvent, it is possible to turn things around and resume trading normally through the use of a business rescue plan. Alternatively, directors could pursue a Company Voluntary Arrangement (CVA), which is essentially a renegotiation of repayment terms that allow the company to continue trading, assuming it sticks to the terms of the arrangement. However, if directors of insolvent companies do not cease trading and also refuse to act in the best interests of creditors, they are likely to be accused of wrongful trading.
Clarke Bell can help
If your company is struggling with its finances and you are considering liquidation, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the best solutions to their problems, be that liquidation or otherwise. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.