With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
You should consider stopping trading once you realise the company may no longer be able to pay its debts as they fall due and there is no reasonable prospect of avoiding insolvent liquidation or administration. Continuing to trade in those circumstances can increase creditor losses and expose directors to personal liability under the Insolvency Act 1986.
Right now, suppliers may be demanding cash up-front, HMRC letters are stacking up, and you might be wondering whether one more order could save the business. This guide cuts through the anxiety with two clear insolvency tests, a red-flag checklist and practical next moves so you can act decisively and protect both the business and yourself.
Stopping trading means drawing a firm line under new liabilities so you can work out the company’s future without adding fresh risk. If you delay, orders you accept or payments you make could later be scrutinised if the company enters a formal insolvency process.
In practical terms, you might:
Turn away new sales or customer deposits
Suspend non-essential purchases and contract commitments
Pay only what protects company assets or meets legal obligations
Store stock safely and protect plant, cash and company records
Record decisions carefully so they can be explained later
This operational pause is not the same as closing the company. Ceasing to trade simply stops day-to-day activity. The company still legally exists and could later be rescued, sold or wound up through a formal insolvency process.
Directors also remain in office. Statutory duties continue: you must safeguard assets, maintain accounting records, file required documents with Companies House and consider the interests of creditors where the company is insolvent.
Why timing matters: liability, disqualification and creditor harm
Once a company becomes insolvent, directors must prioritise the interests of creditors. Continuing to trade when losses to creditors are likely to worsen can expose directors to legal action.
Wrongful trading under section 214 of the Insolvency Act 1986 occurs where a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration and failed to take every step to minimise losses to creditors.
If wrongful trading is proven, a court may order the director to contribute to the company’s assets.
Fraudulent trading (section 213) is more serious. It involves carrying on business with intent to defraud creditors and may lead to criminal sanctions as well as personal liability.
Potential consequences for directors include:
Court-ordered financial contributions to the company’s assets
Director disqualification under the Company Directors Disqualification Act 1986 (between 2 and 15 years)
Reputational damage and difficulty obtaining credit or investment
Example:
Ali stopped taking new orders when forecasts showed the company could not meet upcoming debts and immediately sought professional advice. The liquidator later concluded he had taken reasonable steps to limit creditor losses.
Beth continued trading for several months despite mounting debts and no credible recovery plan. The liquidator reviewed her conduct and brought a wrongful trading claim.
Check if your company is insolvent: two quick tests
Failing either of the legal tests below may indicate that the company is insolvent and that directors must act with caution.
Cash-Flow Test
Balance-Sheet Test
Can the company pay its debts as they fall due?Look at real cash availability and near-term obligations.Missed VAT, PAYE, payroll or rent payments can indicate cash-flow insolvency.
Do total liabilities exceed total assets?Include contingent and prospective liabilities when assessing solvency.
A company can appear profitable on paper but still fail the cash-flow test if it cannot meet debts when due.
If either test is failed, directors should review their position urgently and seek professional advice.
Red-flag checklist telling you to pause trading now
The following warning signs often appear when a company is approaching insolvency:
The bank has refused further lending or overdraft use
Key suppliers require payment on delivery
HMRC tax debts are overdue
New borrowing is needed simply to pay existing debts
Direct debits for rent, utilities or insurance are unpaid
Asset finance lenders have issued default notices
Refunds or customer obligations cannot be funded
Directors are covering business costs with personal credit
If several of these signs appear together, directors should review whether continued trading is appropriate.
High-risk actions to avoid immediately
Certain actions can be challenged if the company later enters liquidation:
Paying particular creditors in preference to others in a way that puts them in a better position than they would otherwise have been in an insolvency
Selling company assets significantly below market value
Accepting new customer deposits where delivery is uncertain
Destroying or concealing company records
Decision routes once a red flag appears
When insolvency risk emerges, directors generally face three broad options.
1. Stop trading and consider liquidation
If the business cannot realistically recover, directors may decide to cease trading and place the company into creditors’ voluntary liquidation (CVL) through a licensed insolvency practitioner.
In liquidation, the company’s assets are realised and distributed to creditors according to the statutory order of priority.
2. Continue trading while exploring solutions
If there is a credible plan to restore solvency, directors may continue trading cautiously while seeking advice and monitoring cash flow closely.
Directors should ensure decisions are carefully documented and that steps are taken to minimise potential losses to creditors.
3. Enter a formal rescue procedure
If the underlying business is viable but debts are overwhelming, formal restructuring options may be available, including:
Administration – a procedure that can protect the company from creditor enforcement while restructuring or selling the business
Administration creates a legal moratorium that restricts certain creditor actions without the administrator’s consent or court permission.
Protecting yourself if you continue trading briefly
If directors decide to continue trading while exploring options, careful documentation is essential.
Good practice includes:
Holding regular board meetings and recording decisions
Preparing up-to-date management accounts
Maintaining short-term cash-flow forecasts
Taking professional advice where appropriate
Avoiding transactions that unfairly benefit particular creditors
Evidence that directors acted responsibly and attempted to minimise creditor losses may be important if their conduct is later reviewed.
Common mistakes directors make at this stage
Several common mistakes can worsen the situation:
Paying certain creditors ahead of others without proper justification
Resigning as director to avoid responsibility
Ignoring HMRC demands or court notices
Relying on unrealistic financial forecasts
Injecting personal money without understanding the risks
Making promises to creditors that cannot be fulfilled
Taking deposits when delivery is uncertain
Signing new personal guarantees in a crisis
If these issues arise, directors should seek professional advice quickly.
Misconceptions clarified
Several common misconceptions can lead directors to make poor decisions.
Resigning ends liability.
Resigning does not remove responsibility for decisions taken while you were a director.
HMRC will automatically shut the company down.
HMRC can pursue debts and petition for winding-up, but it may agree payment arrangements where appropriate.
Directors can choose which creditors to pay.
Preferential treatment of certain creditors may be challenged if the company later enters insolvency.
When to call an insolvency practitioner – and what to expect
Directors should consider seeking advice as soon as they believe the company may be insolvent.
A licensed insolvency practitioner can explain available options, including restructuring procedures or liquidation.
The practitioner will normally review financial information such as:
Recent management accounts
Bank statements
Creditor and debtor lists
Cash-flow forecasts
Key contracts and guarantees
Early advice can help directors understand their responsibilities and avoid actions that could worsen creditor losses.
Quick-glance summary checklist
Review whether the company passes the cash-flow and balance-sheet tests
Identify any insolvency warning signs
Avoid incurring new liabilities where repayment is uncertain
Ensure company records and accounts are up to date
Document decisions and board discussions
Seek professional advice where necessary
FAQs
Can I still pay staff wages if I stop trading?
If funds are available, the company can still meet obligations such as wages. However, directors must consider whether payments are in the best interests of creditors overall if the company is insolvent.
Does stopping trading cancel existing contracts?
No. Contracts normally remain legally binding unless terminated according to their terms or affected by a formal insolvency process.
What happens to employees’ redundancy pay?
If the company becomes insolvent and cannot pay certain statutory entitlements, employees may be able to claim redundancy pay, notice pay and other sums from the government through the Redundancy Payments Service.
Am I personally liable for VAT owed after trading stops?
Tax debts normally remain the responsibility of the company. Directors are generally only personally liable in specific circumstances, such as where personal guarantees exist or certain HMRC notices apply.
Do I need to tell Companies House immediately if trading stops?
Stopping trading does not automatically require notification to Companies House. However, directors must still file required documents such as annual accounts and confirmation statements.
Can I start a new company after liquidation?
Directors can form new companies, but restrictions may apply to using the same or similar company name following liquidation unless specific legal conditions are met.
Will suppliers pursue me personally?
Suppliers can only pursue directors personally where a personal guarantee exists or where wrongdoing such as fraudulent trading is proven.
Do shareholders need to approve stopping trading?
Operational decisions usually sit with directors, but formal insolvency procedures such as voluntary liquidation require shareholder approval.
What records must directors keep?
Companies must keep accounting records sufficient to show and explain transactions and disclose the company’s financial position. These must normally be kept for several years under company law and tax rules.
How is wrongful trading assessed?
Courts examine whether the director knew or ought to have concluded that insolvent liquidation was unavoidable and whether they took every step to minimise creditor losses.
Can a Time to Pay agreement with HMRC help?
HMRC may agree payment arrangements where a business has temporary financial difficulties and demonstrates it can meet the proposed schedule.
Will stopping trading harm my future career as a director?
Not necessarily. Acting responsibly and taking appropriate steps when financial difficulty arises may reduce the risk of disqualification or legal action.
Your next safe step
If your company may be insolvent, review its financial position carefully and consider seeking professional advice. Acting promptly can help directors understand their responsibilities, explore possible restructuring options and avoid actions that could worsen creditor losses.
This guide provides general information only and is not legal advice. Always seek advice specific to your company’s circumstances.
