When a company stops trading, money may continue to be paid into its bank account. Customers may settle outstanding invoices, card payment providers may release retained funds, HMRC may issue a repayment, or a landlord may return a deposit.

Directors are often unsure what they can do with this money. Can it be used to pay creditors? Can it cover the cost of liquidation? Can it be transferred to a new company? Can the director withdraw it?

The answer depends on why the money was received, whether the company is solvent and whether a formal insolvency process has started. However, the starting point is straightforward: stopping trading does not change who owns the money. If the money belongs to the company, it remains a company asset.

Molly Monks F.I.P.A of Parker Walsh, a licensed Insolvency Practitioner, regularly advises directors on how to deal with company funds during the period between stopping trading and entering liquidation.

Stopping Trading Does Not Close the Company

A company does not automatically cease to exist when it stops trading. It remains registered at Companies House and continues to own its bank balance, unpaid invoices, equipment, stock and other assets.

Company money does not become the director's personal money simply because the business has closed. It should not be withdrawn, transferred to a personal account or moved to another company without a proper legal and commercial reason.

This applies even where the director originally introduced money into the company or believes the company owes them money. Any amount owed to the director must be considered alongside the claims of other creditors.

What Happens to Payments for Work Already Completed?

If the company completed work, supplied goods or issued an invoice before trading stopped, the money owed will normally remain due to the company.

The fact that payment arrives after the company has stopped trading does not usually change this. The important question is which company carried out the work and became entitled to the payment.

For example, if an invoice was issued by the old company for work completed before closure, the money will generally belong to that company, even if the customer pays several weeks later. The payment should be recorded and retained for the benefit of the company and its creditors.

Directors should continue to keep an accurate record of outstanding invoices and any payments received. Debtor information will also need to be provided to the liquidator if the company subsequently enters liquidation.

What Should Directors Do Before Liquidation?

Until a liquidator is appointed, the directors generally remain responsible for the company. However, where the company is insolvent, their decisions must take account of the interests of creditors. These duties continue even where trading has already stopped. (GOV.UK)

Money received during this period should normally be preserved. Directors should avoid using it to repay themselves, connected businesses, family members or selected creditors without first taking advice.

Payments made shortly before liquidation can be reviewed by the liquidator. In some circumstances, a payment that places one creditor in a better position than others may be challenged as a preference. The court can make an order restoring the position to what it would have been had the preference not been given. (Legislation.gov.uk)

This does not mean that no payments can ever be made after trading stops. Certain payments may be reasonable or necessary, but the circumstances should be considered carefully and the reason for the payment should be properly documented.

Can Company Money Be Used to Pay for Liquidation?

In many cases, money held by the company can be used towards the cost of placing it into a Creditors' Voluntary Liquidation.

Using company funds for a genuine liquidation expense is very different from a director withdrawing the money personally. The payment should be made directly by the company, properly recorded and agreed with the proposed liquidator.

The position may be more complicated if a winding-up petition has already been presented, the money may belong to someone else, there are competing claims over it, or the company has granted security to a lender. Directors should therefore obtain advice before making the payment.

Can the Money Be Used to Pay Creditors?

Directors should not assume that the fairest approach is to pay whichever creditor is demanding payment most urgently.

Once insolvency is a concern, the objective should generally be to protect the company's remaining assets for creditors as a whole. Paying one supplier, HMRC, a bank, a director or a connected company may reduce the amount available to everyone else.

There may be circumstances in which a payment is appropriate, particularly where it preserves the value of an asset or is necessary while the company's position is being assessed. However, payments should not be made simply because one creditor is applying more pressure than another.

Taking advice before making payments can help protect both the company's funds and the director's position.

Extra Care Is Needed If There Is a Winding-Up Petition

The position becomes significantly more serious if a creditor has presented a winding-up petition.

In a compulsory liquidation, dispositions of company property made after the legal commencement of the winding up may be void unless the court orders otherwise. Because the winding up is generally treated as commencing when the petition was presented, payments made after that date can create considerable difficulty if a winding-up order is subsequently made. (Legislation.gov.uk)

The company's bank account may also be frozen, and a validation order may be required before company funds can be used. (GOV.UK)

A director who becomes aware of a winding-up petition should not continue making payments or moving money without urgent professional and legal advice.

What Happens After a Liquidator Is Appointed?

Once a liquidator is appointed, the directors no longer control the company or its assets and cannot continue acting on the company's behalf. They must hand over the company's property, records and relevant information to the liquidator. (GOV.UK)

Any money paid to the company after the appointment will normally be dealt with by the liquidator. This can include outstanding customer invoices, refunds, compensation payments, tax repayments, proceeds from assets and money released by card processing providers.

The liquidator's role is to collect and realise the company's assets and distribute the available funds in accordance with insolvency law. (Legislation.gov.uk)

If money continues to arrive in the company's old bank account, the director should notify the liquidator immediately. The director should not withdraw, transfer or spend it, even if they still have online access to the account.

Customers who owe money to the company may be asked to pay directly into the liquidation bank account instead.

What If the Payment Belongs to a New Company?

Particular care is required where a director has started a new company after the old company stopped trading.

Money owed to the old company must not be redirected to the new company. This remains the case even if the new company has a similar name, uses the same premises or deals with the same customers.

The new company should have its own contracts, invoices, accounting records and bank account. Customers should be told clearly which legal entity they are dealing with.

Occasionally, a customer may accidentally pay the old company for work genuinely completed and invoiced by the new company. Where this happens, the payment should not simply be transferred without explanation. The contracts, invoices, dates of work and correspondence should be reviewed, and the liquidator should be informed if one has been appointed.

Clear records will be essential to demonstrate which company was legally entitled to the money.

What About Customer Deposits and Advance Payments?

Money received from customers can be more complicated where it relates to work that has not been completed.

If the company has stopped trading and cannot provide the goods or services promised, directors should avoid continuing to accept new orders or advance payments. Online payment facilities, standing orders and automatic payment links may need to be suspended.

Where an unexpected payment is received, it should not automatically be spent or refunded. Its legal status should first be established.

Some funds may be held on trust or subject to specific contractual arrangements, meaning they may not form part of the company's general assets. In other cases, the customer may have an unsecured claim against the company. The outcome will depend on the contract, how the money was held and the surrounding circumstances.

Directors should preserve the funds and provide the relevant contracts, invoices and bank records to their adviser or liquidator.

Keep Complete Records of Every Payment

Good record-keeping is particularly important after trading stops.

Directors should retain bank statements, invoices, debtor ledgers, card processor reports, customer correspondence and details of any refunds or chargebacks. They should also record the reason for every payment made from the company's account.

Company bank accounts and accounting systems should not be closed or deleted prematurely. Even if the business is no longer operating, the information may be required to collect outstanding debts, establish ownership of funds and prepare the company for liquidation.

Moving money without keeping a clear record can create unnecessary questions and may make an otherwise straightforward liquidation more difficult.

Speak to Parker Walsh

Money paid into a company after trading stops will usually remain a company asset. It should not be treated as personal money or transferred to another business simply because the original company is no longer operating.

The correct treatment will depend on why the money was received, whether it was earned by the old company, whether any customer or third party has a claim over it, and whether liquidation or winding-up proceedings have begun.

Molly Monks F.I.P.A of Parker Walsh is a licensed Insolvency Practitioner and provides clear, confidential advice to directors whose companies have stopped trading or are preparing to enter liquidation.

At Parker Walsh, we can review the company's bank position, outstanding customer payments and proposed transactions before any money is moved.

FAQs

Can I withdraw money from the company after it stops trading?

You should not withdraw company money for personal use. The money remains the property of the company and, if the company is insolvent, should normally be protected for its creditors.

Can customers still pay outstanding invoices?

Yes. Money owed for work completed or goods supplied by the company will normally remain due, even though the company has stopped trading.

Can the company's money pay for a Creditors' Voluntary Liquidation?

In many cases, company funds can be used towards the cost of a CVL. The payment should be properly authorised, recorded and agreed with the proposed liquidator.

What happens if a customer pays after the liquidator is appointed?

The payment should be disclosed to the liquidator and will normally be collected as part of the company's assets. The director should not withdraw or transfer it.

Can I transfer the money to my new company?

Not if the money was earned by or is owed to the old company. Where a payment genuinely relates to work carried out by the new company, the position should be supported by clear contracts and invoices and discussed with the liquidator before any transfer is made.

Can I refund customers after trading has stopped?

A refund should not automatically be made without considering the company's financial position and the legal status of the payment. Making selective refunds may affect other creditors, so advice should be obtained first.

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