The liquidation process can be hard to understand as a director, and you may not be fully aware of what you can and can’t do during the process, especially trading.
Trading whilst your company is being liquidated can have severe consequences, so it’s important you know what you are legally allowed to do as a director.
What happens to a company when it goes into liquidation?
When a company goes into liquidation, all of its assets are liquidated, meaning the assets of the company are sold in order to pay back the company’s creditors in order of priority.
This will eventually result in your company being struck off the register at Companies House as it will cease to exist.
You can read our dedicated post on Company Liquidation to find out more.
How long do companies stay in liquidation?
There is no legal time limit for how long companies can stay in liquidation – from beginning to end, it can usually take around 6 to 24 months to fully liquidate a company.
However, this will all depend on your company’s financial position and the form of liquidation you are undertaking.
Does a company still exist after liquidation?
No, once liquidation is complete, a liquidated company will cease to exist as it has been removed from Companies House records.
Can a company trade in liquidation?
No, a company cannot trade in liquidation. Once the decision has been made to liquidate a company, all directors should stop trading immediately.
The UK has a series of insolvent laws in place in order to protect creditors from any additional financial loss.
What can happen if a company trades while in liquidation?
If you continue to trade whilst your business is in liquidation, you could face severe legal repercussions under the Insolvency Act 1986. Not complying to this act could result in personal liability under both civil and criminal law.
You could be charged with Wrongful Trading, which is a civil offence that occurs when company directors fail to minimise losses to company directors. If you continue to trade past the point of insolvency, you are committing Wrongful Trading and be held personally liable for company debt.
Company directors can face heavy consequences from wrongful trading, including disqualification from directing a company for up to 15 years.
You can learn more details about what happens to a Director of a company during liquidation in our dedicated guide.
Is it possible to continue trading in liquidation?
There are rare cases in which a company is appointed a liquidator who is allowed to carry out very restricted trade. However, it is important to note the liquidator is always acting in the best interest of the creditors, not the company.
When a liquidator continues to trade, it is usually in order to maximise the company’s assets before they are liquidated and transformed into payments for creditors.
Is trading in liquidation the same as trading whilst insolvent?
Trading in liquidation is not quite the same thing as trading whilst insolvent.
The main point of liquidation is to shut a company down, and so directors aren’t given the opportunity to continue trading at this stage anyway as a licensed Insolvency Practitioner (IP) will take over the company.
When a company is insolvent, it means it is unable to pay the debt it owes. This is typically the first step towards liquidation, or a different route of rescuing the business. During the insolvency process, directors must stick to certain requirements and legal duties, which are all in the best interest of the creditors.
The company must cease trading during insolvency, otherwise it is deemed as improper and wrongful.
If the appointed liquidator discovers signs of wrongful trading in their investigations, the company directors will be prosecuted.
Why a company in liquidation is not allowed to trade
The laws of insolvency and liquidation in the UK are in place in order to protect creditors from any unnecessary financial losses, as well as safe guarding the general public from directors who deliberately seek to defraud.
It is therefore a statutory requirement to cease trading when a company is no longer solvent.
If you are currently facing insolvency or liquidation, and you are still unsure whether you can or cannot trade, get in touch with our expert team today. We will take time to understand your situation, and guide you through your legal rights as a director.