This article will explain what it means to cease trading, and what the ramifications are for both company directors and creditors.
What Does it Mean to Cease Trading?
Ceasing trading is an official term for when a business stops running. Employees are laid off, assets sold and, in many cases, the business name will be struck off the register at Companies House.
This usually happens for several reasons:
- the directors have reached the point of insolvency
- directors are not in debt but choose to shut the business due to retirement, health issues or simply because their interests have moved elsewhere
- If the ceasing to trade is voluntary, the directors will sell off any company assets and distribute the proceeds amongst shareholders before closing the company down
- If the company is insolvent, the asset sale must be handled by an insolvency practitioner who will ‘liquidate’ before distributing the proceeds amongst creditors, by order of preference.
Ceasing to Trade Voluntarily
Many directors who sense compulsory liquidation may be imminent choose to voluntarily liquidate. This process, known as creditors voluntary liquidation, allows the directors to retain more control than being forcibly wound up.
Directors of a solvent company also need the assistance of an insolvency practitioner to formally close a company that is in profit. This process is known as members voluntary liquidation, to which there may be tax benefits via something called Entrepreneurs Relief.
Forced to Cease Trading
Of course, if you receive a letter such as a winding up petition because of unpaid debts, a judge will hear the case. Where it is ruled against you, you could find yourself with a ‘winding up order’ which means you must cease trading immediately, prior to compulsory liquidation.
What Does ‘Ceasing Trading’ Mean for Company Creditors?
If you are owed money by a company which has stopped trading, you first need to try to ascertain the exact state of affairs. Have they gone into liquidation? Are the directors in the process of dissolving it?
If it’s insolvent, you should see notice via searching the London Gazette, which is the official notice of public record. Any notices pertaining to them on here will include details of the office holder, which means the insolvency practitioner. This is the person to contact to find out what’s happening, and what is your situation as creditor.
Company’s may not be dissolved unless debts are first settled. It is possible for a creditor (such as HMRC) to object to a company strike off, or even apply to have a company put back on the companies register so it can face legal proceedings for unpaid debts.
Closing a limited company down is done by applying to Companies House using Form DS01, which must be signed by the directors. This supposes all debts have been made good, assets disposed of, and the company affairs otherwise in order.
It is possible to sue a company that has since gone into liquidation, but you’ll need to contact the relevant insolvent practitioner where your claim will join those of other creditors.