Liquidation is a formal process that, when enacted, closes a limited company and draws a line under its debts. While the business may cease to exist with the company, it may be possible for that business to continue after liquidation.
Business or company?
An important distinction to make when discussing a business’ continuation after liquidation is the difference between a business and a company.
- A business refers to a commercial activity.
- A company is a legal entity through which a commercial activity is conducted.
Business can be carried out without a limited company; with self-employed sole traders being an example.
When people say, “my business is closing”, they might mean that the limited company that they conduct their business through is entering liquidation.
Liquidation and restarting
If your company is struggling financially, depending on its situation, it could enter a Creditors Voluntary Liquidation (CVL). This process allows your insolvent company to close, drawing a line under its debts and allowing you, as director, to walk away.
A CVL must be carried out by a licensed and regulated insolvency practitioner.
Even if the company closes through liquidation, it may be possible for the business to continue. This can sometimes be done by closing the old company and starting a new one through a pre-pack liquidation.
Closing the old company and restarting in such a way can have numerous benefits.
The newly formed company purchases the old company’s assets at market value, allowing the business to continue free from the old company’s liabilities. It could even have some of the same directors as the old company, and some of its employees.
Additionally, a pre-pack could offer a better return to creditors than in a CVL.
While you may find these potential benefits tempting, it can be difficult to obtain investment, and it could sour relationships with creditors if they’re set to lose out financially. There will likely be restrictions around using the old company’s name or one similar enough to suggest an association.
Whether a pre-pack is feasible depends on your company’s circumstances, and you should consult with your assigned insolvency practitioner as to whether it’s a possible route forward for your business.
The process will generally only be a viable option if your company has a good business model but the existing company has cash flow issues, historic debts, or creditor pressure that’s hindering trading.
Director investigations post-liquidation
As part of any liquidation process, the insolvency practitioner will investigate your conduct as director in the time leading up to and during the period of insolvency. This is to make sure that you’ve acted in the best interests of your company and its creditors. If you have done so and fulfilled your directorial duties, chances are you can move on without further ramifications.
However, if you have committed action unbefitting of a director, you could face further ramifications that could hinder the continuation of your business.
If you continued to trade while the company was insolvent as if nothing was wrong, you may have traded whilst insolvent. This can lead to accusations of wrongful trading, wherein you worsen your creditors’ position by continuing to trade while insolvent. Doing so can have severe consequences:
- Personal liability for the company’s debts.
- Criminal investigation if the insolvency practitioner suspects fraudulent trading.
These can lead to a director ban for anything up to 15 years.
Summary
It might be possible for a business to continue even after the company is liquidated. The company is the legal entity through which the business is conducted, rather than being the business itself. A company struggling to cover its liabilities as and when they fall due can close through a Creditors Voluntary Liquidation (CVL), drawing a line under the debts. Depending on the company’s circumstances, it might be possible to continue the business in a new limited company. You should speak to your insolvency practitioner as to whether this is feasible and discuss the potential benefits and drawbacks.
If you’ve acted responsibly and fulfilled your duties as a director leading up to and during the period of insolvency, you could start a new venture following the liquidation. However, if you’re found to have made the situation worse by trading whilst insolvent or wrongful trading, you could be subject to a director ban, and even personal liability for the insolvent company’s debts.
