Can I Continue to Trade if my Company is Insolvent?
In short, no, a company which is insolvent or about to go into liquidation cannot trade. Once you have decided to liquidate your company, as a director, you should stop trading immediately, as you could be breaking civil and criminal law. This is because typically when a company is insolvent, ongoing trading can worsen its financial position and result in increasing the losses for creditors. As a director, if you allow trading to continue, despite knowing that you cannot repay your debts, you can be held personally liable for wrongful or fraudulent trading.
Once your company is in liquidation, the primary purpose is for an insolvency practitioner to sell off the company assets to repay its creditors. Continuing to trade before the liquidation starts can jeopardise the value of these assets, reducing their worth and decreasing the sum of money creditors will receive.
Why is it Illegal for an Insolvent Company to Trade Once a company is insolvent the Directors must ensure that they preserve any existing value in the assets of the Company and they should cease to trade to avoid breaching any of the terms of the 1986 Insolvency Act. This act governs insolvency in the UK, outlining the rules and responsibilities of debtors and directors, and protecting creditors’ rights. As a result of this, continuing to trade while insolvent will mean you are committing Wrongful Trading (section 214).
What Classes as Wrongful Trading When a Company is Insolvent?
When you (the director) continue trading despite knowing that the company is going into liquidation, this is classified as wrongful trading. This means that you can be held personally liable for this offence and will therefore be accountable for any debts incurred by the trading.
What Is Fraudulent Trading When a Company is Insolvent?
Fraudulent trading occurs when a director continues trading with the intent of defrauding its creditors. This is a criminal offence and can result in imprisonment of up to 10 years, alongside monetary fines being given.
Failing to stop trading while insolvent, could also see you facing a disqualification for up to 15 years under the Company Directors Disqualification Act 1986. This means you would be legally prohibited from forming or managing a new company, acting as a director, or influencing decisions in a business for the duration of the disqualification period.
Legal Requirements to Be Aware of When a Company is Insolvent
In the lead up to the liquidation process, it is also important to ensure that any assets under your control are dealt with properly and you must avoid any disposals which are at an undervalue. Insolvency practitioners can recover any transferred assets sold for less than their value within two years of the company’s liquidation, under Transactions at Undervalue (Section 243).
You also cannot show any preferential treatment to creditors during the lead up to the liquidation process. Doing so can result in legal challenges from the insolvency practitioner under Preferences (Section 245). Showing “preference” to a creditor can be anything from paying them ahead of normal trading terms to giving them a payment which puts them in a better position than other creditors. The insolvency practitioner can apply to the court for this to be reversed if they suspect any unlawful activity.
How Long Do Companies Stay in Liquidation?
The time it takes to complete the liquidation of a business will vary significantly, depending on the type of liquidation process the company engages in, and the complexity of the business. However, with this in mind, here are some general time frames for the three main types of liquidation, compulsory liquidation, members’ voluntary liquidation, and creditors’ voluntary liquidation.
Compulsory Liquidation
The timeline for compulsory liquidation can often take longer than other types of liquidation, due to being legally complex and involving the UK Court system. Typically, this type of liquidation can take between 12–24 months to be fully complete. The process begins with a Winding UP Order being made in the Court, which is then followed by either the Official Receiver, or an insolvency practitioner being appointed to manage the process. Assets will then be sold off to make repayments and cover any debts with the creditors. If there are any legal disputes, the process can take longer, however, once the assets are sold and debts are settled the company will be dissolved and struck off the Companies House register.
Members’ Voluntary Liquidation (MVL)
MVL’s are “solvent” liquidations and therefore can take a shorter period to complete, typically between 6 and 12 months for the company to be dissolved. The process involves several steps, appointing an insolvency practitioner, sending a declaration of solvency to Companies House (CH), informing creditors, advertising the liquidation, the sale of assets and the distribution of funds, and finally removing the company from the CH register.
If your company’s affairs are straightforward, and your business has minimal assets and no outstanding liabilities, the process can be faster and completed in as little as a few months.
Creditors’ Voluntary Liquidation (CVL)
CVL also takes around 6 to 12 months for liquidation to be complete. The process begins by determining that the company is insolvent, you will then appoint an insolvency practitioner. You will then need to inform creditors of the liquidation process, produce a Statement of Affairs and convene a statutory Decision Procedure to place the Company into Liquidation. The assets will then be sold by the liquidator to repay amounts due to the creditors before you can finally have your company dissolved at Companies House.
If the business’s financial situation is complex and there are legal disputes involved, this can significantly increase the time it takes to complete the liquidation process.
Does a Company Still Exist After Liquidation?
When a company enters the liquidation process, this effectively marks the end of the company’s existence. The business ceases trading and the insolvency practitioner begins the process of selling its assets to repay any creditors. Once the liquidation process is complete, the company is formally dissolved and will be struck off the Companies House register, meaning the business no longer exists.
Once your company is dissolved, you cannot reuse the business’s name or a similar name for a new company for five years after the liquidation, unless permitted by the court. This is stated in the Restriction on Reuse of Company Names (Section 216), which was put in place to prevent directors from liquidating a business and starting a new one to avoid liabilities.
A Director’s Legal Duty to Creditors When a company is insolvent and at risk of entering into liquidation, as a director, you have specific legal duties to your creditors to act in good faith, and have their best interests when making decisions. There are several ways you can ensure you are following your legal duty:
● Do Not Trade While Insolvent: As a director, you must not allow the company to incur further debts, and continuing to trade can jeopardise the value of current assets.
● Give Accurate Information: Provide the liquidator with accurate information regarding the business’s financial situation. This includes assets, liabilities, and any relevant documents.
● Cooperate with the Insolvency Practitioner: You should assist the liquidator in their duties, giving them access to company records and providing answers to any questions.
● Prioritise Creditors and Be Fair: When making any decision, you should have the interests of the creditors in mind. You must treat all creditors fairly, ensuring everyone is paid at the same time and no preferential treatment is given.
