Trading insolvently: Can a dissolved company still operate?
When a company is struggling financially, it has several options, often involving external financial support. If the business has significant debts and is considered no longer commercially viable, one possible option is insolvent liquidation.
To help explore options available if you are trading whilst insolvent in more detail, Liquidation Centre has compiled this blog post. We cover several key questions, such as:
- What happens to a company that is trading while insolvent?
- How to report a dissolved company still trading.
- Whether liquidating a company and starting again is a viable option.
What is trading while insolvent?
Trading whilst insolvent is when a company continues to operate (i.e., trade) even though it can no longer pay its debts as they fall due, or its liabilities exceed its assets
Primarily, this can happen in one of two ways:
Cash flow insolvency: when the organisation cannot pay its creditors payments as they fall due.
Balance sheet insolvency: when the business’s total liabilities are greater than the value of its assets.
What is the difference between trading in liquidation vs. trading while insolvent?
Trading in liquidation is when a company continues trading activities after a liquidator has been appointed, usually where it is necessary to preserve or realise assets for the benefit of creditors.. This differs from trading while insolvent, in which the business continues to operate and incur debts, even though it cannot meet its ongoing financial obligations.
The key difference is that, in the case of trading while insolvent, the formal winding-up process has not yet begun. In contrast, when an organisation is trading in liquidation, the liquidation process is already in progress and controlled by the duly appointed liquidator.
Can a company in liquidation still trade?
In most cases, no. A company in liquidation is not permitted to continue normal trading, although limited trading may be authorised by the liquidator, under licence where it is necessary to preserve or realise assets for the benefit of creditors.
Once the company can no longer pay its debts as they fall due, or its liabilities exceed the value of its assets, it is considered insolvent and directors should cease trading and seek professional advice.
Why is trading while insolvent not allowed?
Trading while insolvent is not allowed, as directors have a legal requirement to protect your creditors from any unnecessary losses.
If you continue to trade when you know, or ought reasonably to know, that the company cannot avoid insolvent liquidation, you may risk the potential of the liquidator bringing claims against you, as further debts could be incurred at the expense of creditors.
Why is trading during liquidation not allowed?
It’s a statutory requirement for a company to cease trading once a liquidator has been appointed, except where limited trading is specifically authorised by the liquidator for the purpose of beneficial realisation of assets.
Once the company enters a liquidation process, any remaining company assets are sold off to help raise money and repay your creditors where possible. By definition, Insolvency means there are insufficient funds to repay creditors in full.
Trading during liquidation, unless it is under the control of a liquidator, can worsen creditor losses by creating additional liabilities and may constitute misfeasance or breach of directors’ duties.
Restricting trading during liquidation therefore protects creditors and the public, and reduces the risk of asset dissipation or fraudulent conduct.
Are there any circumstances when companies are allowed to trade during liquidation?
Directors must not continue trading once a liquidator has been appointed, as control of the company passes to the liquidator.
In some situations, the Insolvency Practitioner (acting as a liquidator)
may continue or commence restricted trading where this is necessary to preserve or enhance the realisable value of the company’s assets for the benefit of creditors.
This can include collecting outstanding customer payments or completing work in progress, provided it is in the best interests of creditors and properly authorised.
What happens if you are caught trading while insolvent?
If a director continues trading while insolvent, they could be accused of wrongful trading. This is a serious breach of director duties that could result in further financial losses for creditors.
If a claim is established by the liquidator, the potential consequences can include:,
- Personal contribution orders requiring the director to compensate the company’s assets
- Director disqualification for up to 15 years
- Fines or imprisonment in cases involving fraudulent trading or other criminal misconduct
- Recovery or misfeasance action brought by a liquidator
These consequences arise primarily where directors continue trading when they knew, or ought reasonably to have known, that insolvent liquidation was unavoidable, rather than simply because a company has been dissolved.
This is why obtaining professional insolvency guidance can help directors understand their legal responsibilities and options if cash flow issues arise or the company becomes insolvent.
Reporting a dissolved company still trading
It’s possible to report a dissolved company that is still trading to the Insolvency Service or Companies House.
This can be done:
- Online (via a complaint form)
- By writing to the Insolvency Service’s Intelligence Hub
- By requesting a form by phoning 0303 003 1744.
Once a company has been dissolved and struck off the Companies Register, it legally ceases to exist and therefore cannot trade or enter into contracts.
The Insolvency Service has powers to investigate misconduct by former directors and others connected with the company, including trading after dissolution, fraud, or misuse of company assets.
If the complaint appears serious, the matter may be formally investigated, referred to another regulatory or enforcement body, or pursued as a criminal offence where appropriate.
Can I liquidate my company and start again?
Yes, you can liquidate a company and start a new one, provided you’re not bankrupt or disqualified from acting as a director.
However, there are a few considerations to take into account:
- You aren’t allowed to use the same (or a similar) name as the liquidated company for at least the next five years.
- It may be difficult for you to secure credit if your liquidated company becomes insolvent.
- You may need to pay an HMRC security deposit if your previously liquidated company has any unpaid debts.
That said, you’re allowed to trade a similar business to the closed one (just not using an insolvent company’s name).
There may also be restrictions on using assets from a closed company in your new one. In circumstances like this, it’s advisable to consult the closed company’s assigned liquidator or administrator on the terms and conditions behind this.
The same would apply to any staff you wish to employ from your old company for your new one.
For more information, check out how to close my limited company and get started on the limited company liquidation process.
Should I liquidate my company?
This depends on the financial situation of your company.
Liquidation is usually considered a last resort once all other avenues have been exhausted.
Initially, you could explore informal negotiations with creditors or formal insolvency procedures such as a Company Voluntary Arrangement (CVA) or administration to help turn your business around.
If it appears that your company cannot reasonably avoid insolvent liquidation or is no longer commercially viable, closing it via liquidation may be the most appropriate course of action to protect creditors’ interests and fulfil your legal duties as a director.
Note: This is different to a Member’s Voluntary Liquidation (MVL), which is used for solvent companies that no longer wish to trade and is part of the solvent liquidation process.
A CVL gives you more control over how the process is handled by appointing a preferred insolvency practitioner to act as liquidator.
This also helps directors comply with legal requirements and reduces the risk of being accused of improper practice. You may also be in a position to claim a director’s redundancy package.
The alternative is compulsory liquidation – a formal insolvency process by order of the court. This usually occurs after a creditor has taken recovery action and presents a winding-up petition, although other eligible parties may also petition in certain circumstances (WUP).
Final thoughts
At the Liquidation Centre, we understand that choosing to liquidate your business is not an easy decision.
After investing your heart, soul, time, energy, and money into your business, the last thing you’ll probably want to do is fold and give up. However, sometimes in business, the hardest decisions are the right ones.
If your company is no longer profitable and accruing more and more debt, it may be the right time to explore whether liquidation is the most appropriate next step.
We’re here to guide you through the liquidation process, help you meet your statutory duties as a director, and help ensure you meet the legal requirements required to wind up your company correctly.
Contact us for more information, a free consultation, or to arrange a meeting and get a quote from one of our insolvency experts.
Trading Insolvent FAQs
What is trading in liquidation? ▸
Trading in liquidation refers to circumstances where a company has entered the formal liquidation process and trading activity is continued by the liquidator where this is necessary to realise assets or achieve a better outcome for creditors.
Can a dissolved company still trade? ▸
No. By law, a dissolved company cannot trade because it no longer legally exists once it has been struck off the Companies Register.
Any business activity carried on in the company’s name after dissolution may constitute a criminal offence and could result in personal liability for those involved.
Is it illegal for a dissolved company to still trade? ▸
Yes, if a dissolved company continues to trade, it is unlawful.
The company no longer legally exists once it has been struck off the Companies Register.
Any business activity carried on in the company’s name after dissolution may give rise to criminal offences and personal liability for those responsible.
What is the penalty for trading while dissolved? ▸
There are several potential consequences of carrying on business after a company has been dissolved, including:
- Criminal sanctions, which may include fines or imprisonment in serious cases.
- Personal liability for debts incurred while trading in the name of the dissolved company.
- Recovery action by creditors or a liquidator if the company is later restored to the register.
- Director disqualification for up to 15 years under the Company Directors Disqualification Act 1986
When will the Insolvency Service investigate a dissolved company? ▸
The Insolvency Service has powers to investigate the conduct of former directors of dissolved companies where there is evidence of misconduct or harm to creditors.
Examples of circumstances that may lead to investigation include:
- Allegations of fraud or serious misconduct, including scams or dishonest trading.
- Breaches of statutory or regulatory requirements that leave fines, penalties, or enforcement action unresolved.
- Phoenix activity, where a similar business continues through successive insolvent or dissolved companies without addressing creditor losses.
- Persistent non-compliance with company law obligations, such as repeated failures to file accounts or confirmation statements.
- Misuse of the dissolution or liquidation process to avoid debts or proper investigation. Failure to comply with legal requirements when applying for company liquidation.