Are you considering voluntary insolvency?

If you’re the director of a struggling business, it’ll doubtless be an incredibly stressful time. However, while you might feel powerless, the fate of your business is still in your hands. Even if it is beyond the point of making a recovery, you can still decide how and when to close your business down.

Choosing to enter into a formal insolvency process voluntarily gives you much more control. Not only does it help to protect your creditors from further losses (an extremely important point we’ll discuss later on), but it also reduces the scrutiny you, as the company director, will be subjected to during the process.

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What is Voluntary Insolvency?

Voluntary insolvency is the term given to the process where you put your hands up and say “my company is no longer financially viable and I need help”. Perhaps pressured by forthcoming creditor action you make the decision to close down the beleaguered business and liquidate the debts.

But firstly become clear of your financial situation.

There are two recognised tests for an insolvent business. They are:

  • The cash-flow test – You are unable to pay bills when they become due or in the reasonably near future.
  • The balance sheet test – Your company owes more than it owns i.e. its assets are worth less than its liabilities.

If either or both of these are true of your business and you’re not expecting any material change of your circumstances any time soon, there’s a very good chance your business is insolvent.

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 effect on creditors has to be managed.

Voluntary insolvency shows that the directors are aware of their problems and are trying to do everything they can to reduce the impact. However, this is not the route every director chooses to take.

The less pleasant route some directors take is to bury their heads in the sand and hope that their business will miraculously turn itself around, regardless of the further damage this will do to the business’s creditors. The result is that a creditor such as a bank, supplier or HMRC has little choice but to force a formal insolvency process on the business to prevent it from accumulating further debt.

This will usually take the form of 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 be scrutinised by the official receiver and the court extremely closely.

That could potentially lead to the directors being made personally liable for the company’s debts and even being disqualified from running a business for a period of up to 15 years. In a voluntary insolvency process, the conduct of the directors will not be investigated to the same extent.   

What is Voluntary Liquidation of a Company?

Voluntary liquidation is a process the directors of a company willing enter into to protect their creditors’ interests and close their business down. The voluntary liquidation of an insolvent business in the UK is called a creditors’ voluntary liquidation.

The process begins with the company directors seeking the advice of an insolvency practitioner who will analyse the company’s finances to determine the best route forward. If the business is no longer commercially viable then a creditors’ voluntary liquidation may be the most appropriate solution. The process of a typical creditors’ voluntary liquidation is as follows:

  • The directors contact an insolvency practitioner
  • All possible options are considered
  • A creditors’ meeting is held and a liquidator is appointed
  • The company’s assets are liquidated, the money is distributed to the creditors and the company is closed down

Clearly, a voluntary liquidation is a very serious step as it will lead to the dissolution of your company. However, there are a number of benefits associated with a creditors’ voluntary liquidation when compared to other insolvency outcomes. That includes:

  • The likelihood that the company directors will be charged with wrongful or fraudulent trading in a creditors’ voluntary liquidation is much less than a compulsory liquidation, particularly if they seek help as soon as they are aware the company is insolvent.
  • Unsecured creditors of the company such as suppliers and employees will be paid from some of the money raised through the sale of the business’s assets. Although it may not be all the money they are owed, they should still receive a proportion of the funds.
  • The repayment of creditors means 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. If 90 percent of the shareholders agree to short notice then the creditors’ meeting can take place in seven days, which is the minimum statutory notice for the company’s creditors. The liquidator then has to value and sell the assets, complete their investigations and do the paperwork. This can take just a few months for small businesses and up to two years for larger organisations.  

There’s no legal time limit for a voluntary liquidation, but from beginning to end it will usually take no less than six months.  

What Happens When a Company Goes into Voluntary Insolvency?

This depends on which insolvency procedure is decided upon.

If it is liquidation, then the directors stand down from the running of the company, while the insolvency practitioner works to catalogue what assets are owned, what debts outstanding, and the best course of action for finding as much return as possible from creditors.

If it is liquidation, then the directors stand down from the running of the company, while the insolvency practitioner works to catalogue what assets are owned, what debts outstanding, and the best course of action for finding as much return as possible from creditors.

After this process, which usually takes the better part of a year, the company will be struck off the register at Companies House and dissolved.

What are the Consequences of Insolvency?

The consequences of insolvency would depend upon which course of action is chosen.

If it’s a company rescue process such as a CVA, the result may be the return to profitability of the company.

If you choose to liquidate then the result would be the striking off of the company from the register at Companies House, and the legal end of the company.

Assuming no directorial misconduct was found, directors would be free to assume the directorship of another company, or another role.

Want 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.