Can we Trade Out of Insolvency?

Whether it’s possible to trade out of insolvency depends on many factors. Strictly speaking, an insolvent company should cease trading and failure to do so can result in the risk of personal liability for directors. The point when a business is definitely insolvent is clear in some cases and not in others.

There are practical considerations that apply to the possibility of trading your way out of insolvency. Can you realistically reduce overheads and/or raise finance? Will creditors negotiate with you? Are you prepared for the very stressful and difficult challenge ahead? Is it important to you to try to maintain valuable relationships with suppliers and customers in the future?

Even if you are determined to try to continue trading with significant debts, you may find (in the absence of a clear agreement with all creditors) that one or more creditors might take action, which results in them ultimately winding up your business, taking the decision out of your hands.

To minimise legal risks, if you are not sure whether your business is financially viable, the best option is to seek professional advice. This will help to protect you as a director. Please do give us a call or email; we can help.

Often any realistic plan to trade your way out of insolvency will need either an informal arrangement with creditors (which you will need to stick to), or a more formal plan in conjunction with licensed insolvency practitioners.

Can a Company in Liquidation Still Trade?

No, once a company is in liquidation, it cannot continue to trade in the ordinary course of business. When a liquidator is appointed, their primary responsibility is to wind down the company’s operations, sell its assets, and distribute the proceeds to creditors. Trading activities are typically halted, and the focus shifts to settling debts and closing the company.

Two Methods of Trading Out of Insolvency

(1) Informal Negotiations with Company Creditors

Where a company has a historical track record of success and a long-standing relationship with creditors, it may be possible to negotiate repayment holidays or a structured payment plan to enable you to establish some breathing space to get the company back on track.

Discussions should be accompanied by a formal plan that includes:

• Cash Flow Forecasts
• Time frame for your own collection of unpaid invoices
• Details of the credit terms you are requesting (best to err on the side of caution here)
• Detailed notes about how the situation arose and what you intend to do to trade out of it.

(2)  Company Rescue Process

Insolvency practitioners might help with some of the following options:

• Setting up a company voluntary arrangement – a formal repayment plan that must be voted upon by creditors
• Alternative finance, such as Invoice factoring, can help with the cash-flow cycle
• Going into administration could be an option for larger companies
• If the creditor is HMRC, it may be possible to negotiate a Time to Pay agreement

What Can Happen If a Company Trades While in Liquidation?

If a company continues to trade while in liquidation without the approval of the liquidator or the court, it can lead to serious legal consequences. Here are some potential outcomes:

1. Personal liability: If the company’s directors and officers knowingly trade while insolvent, they may become personally liable for its debts incurred during this period.
2. Legal action: Creditors or the liquidator may take legal action against the directors and officers for allowing the company to trade in violation of liquidation regulations.
3. Impact on creditors: Trading can deplete the company’s remaining assets, leaving less for distribution to creditors, which can harm the interests of those owed money.
4. Disqualification: Directors who engage in wrongful trading during liquidation may face disqualification from serving as directors in future companies.

Why a Company in Liquidation Is Not Allowed to Trade

A company in liquidation is not allowed to trade in the ordinary course of business because the primary objective of liquidation is to wind down the company’s operations and distribute its assets to creditors in an orderly and fair manner. Here are the key reasons why trading is restricted or halted during liquidation:

1. Protection of creditors: The primary duty of a liquidator is to protect the interests of the company’s creditors. Allowing the company to continue trading can result in the accrual of new debts, which may decrease the amount available to repay existing creditors.
2. Prevention of wrongful trading: Trading while insolvent, i.e., when a company cannot pay its debts as they fall due, is unlawful in many jurisdictions. Allowing the company to trade during liquidation without proper authorization can expose directors and officers to personal liability if they knowingly engage in wrongful trading.
3. Fair distribution of assets: Liquidation aims to ensure that the company’s remaining assets are distributed fairly among its creditors according to their legal entitlements. Trading during this process can disrupt this equitable distribution.
4. Focus on closure: The ultimate goal of liquidation is to close the company in an orderly manner, settle its debts, and dissolve it as a legal entity. Continued trading can prolong the liquidation process and delay the final distribution to creditors.

Is Trading in Liquidation the Same as Trading Whilst Insolvent?

No, trading in liquidation is not the same as trading whilst insolvent. Trading while insolvent refers to a company continuing its business operations when it cannot pay its debts as they fall due or its liabilities exceed its assets. This practice can lead to legal implications for directors, including potential personal liability, but it is not, by definition, illegal.

On the other hand, trading in liquidation is typically prohibited. In exceptional cases, a liquidator may allow limited trading activities but this is done under the liquidator’s supervision.

Can a Company Still Trade in Administration?

Yes, although you will lose your control over the business as director/shareholder. Going into administration is an insolvency process suitable for larger companies. In this case, if it is ascertained by the insolvency practitioner that the business has a good chance of getting back on its feet again in the future, the Insolvency Practitioner then runs the company. Administration provides a legal moratorium on further creditor action, while the IP restructures the company.

Since businesses have more inherent value when they are still operating, the insolvency practitioner will often decide to keep the business operating during the period of administration. This is known as a ‘trading administration.’

Wrongful Trading

The key concern for the directors of limited companies who continue to trade whilst insolvent is wrongful trading. 

Wrongful trading is a civil rather than a criminal offence. The risk for directors is that where wrongful trading is established the director can be required to personally contribute towards payment of the company’s debts.

Ready to Navigate Your Company’s Next Steps?

At Company Debt, our team of experienced professionals is here to provide you with the guidance and support you need during this challenging time. Whether you’re exploring the possibility of trading in liquidation or seeking advice on how to manage insolvency, we’re here to help. Contact us today to discuss your situation and discover how we can assist you.