Voluntary insolvency essentially means accepting that your business is insolvent and then taking the initiative to either proceed to voluntary liquidation (or administration or company voluntary arrangement if either of these are possible). Accepting that your business is insolvent will mean instructing an Insolvency Practitioner to step into your role as director.
If you’re the director of a struggling business, it is often better to voluntarily accept that your business is insolvent and proceed to voluntary liquidation.
Recognising that your business is insolvent means you stop trading immediately. If you continue to trade while insolvent you may create personal legal risks for yourself. If you wait for a creditor to compulsorily wind up your company, the process is often more hostile and the creditor may well appoint their own Insolvency Practitioner.
Choosing to enter into a formal insolvency process voluntarily gives you much more control and may well reduce the scrutiny on you, as company director.
Our Insolvency Practitioners are instructed on hundreds of voluntary insolvency matters each year. Please do get in contact to find out how we can assist you.
Why Accepting Voluntary Insolvency may be the Best Option
Once you know, or should reasonably be expected to know, that your business is insolvent, you are legally obliged to operate in the best interests of your creditors. That usually means ceasing to trade, as continuing to trade an insolvent business could increase the amount of money owed to creditors like HMRC.
The first step to the voluntary insolvency process is to seek the help of an insolvency professional. They will be able to help you consider your options and protect your interests as a company director.
Voluntary vs. Compulsory Insolvency
Company directors are expected to understand their duties and know that if the company is paying its bills late each month, or struggling to pay them at all, the company should cease trading.
If after ceasing to trade you do not instruct an Insolvency Practitioner to proceed with a voluntary liquidation, it is likely that a creditor will at some point start a compulsory liquidation process..
Compulsory liquidation is most often commenced by a bank, major supplier or HMRC using a statutory demand followed by a winding up petition if the debt continues to go unpaid. That will eventually lead to the compulsory liquidation of the company. In this process, the conduct of the directors will generally be scrutinised by the Official Receiver and the court more closely than with a voluntary insolvency process.
What are the Benefits of Voluntary Liquidation?
The possibility that company directors will be charged with wrongful or fraudulent trading in a creditors’ voluntary liquidation is generally lower than with a compulsory liquidation.
Taking action voluntarily may mean that relationships with some creditors may be preserved which could be beneficial if the directors choose to set up a new business in the same sector.
How Long Does a Voluntary Liquidation Take?
A voluntary liquidation takes less time than a compulsory liquidation to complete. The appointment of a liquidator usually takes between one and two weeks.
There’s no legal time limit for a voluntary liquidation, but from beginning to end it will usually take no less than six months.
Do You Need Voluntary Insolvency Advice?
If you’re considering voluntary liquidation or think your business might be insolvent, we can help you consider all your options and discuss whether a voluntary insolvency might be a suitable route for you. Get in touch today for a free, no-obligation consultation with one of our advisers.