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Voluntary Insolvency

Is your company insolvent? If your company is unable to pay its debt or has debts greater than the total value of its assets, it’s insolvent. As a company director, you need to take immediate action if your company is insolvent or likely to become insolvent in the near future.

One way to respond to insolvency is through voluntary liquidation — a process that’s also called voluntary insolvency. When your company enters into liquidation voluntarily, its assets are sold in a liquidation sale in order to raise cash and pay the company’s creditors.

Should your company use voluntary liquidation? As director, you can’t enter into liquidation on your own. Instead, you need to contact an insolvency practitioner as you learn your business is insolvent. They will work out the best solution for your company’s future.

Are you concerned about your company’s solvency? Read on to learn more about the process of entering into voluntary liquidation, as well as alternative solutions available for your company that can prevent the liquidation process.

What is voluntary liquidation (voluntary insolvency)?

Voluntary liquidation is a form of liquidation that your company enters into voluntarily. The most common form of voluntary liquidation for UK companies is a Creditors’ Voluntary Liquidation (CVL).

A company can enter into voluntary liquidation when it’s insolvent. An insolvency practitioner will analyse the company’s finances in order to determine the best option for prioritising the interests of its creditors. If the company is commercially viable, this might be a CVA (Company Voluntary Arrangement) or an alternative insolvency procedure such as pre-pack administration.

If the insolvency practitioner finds that the company isn’t viable, a meeting can be arranged with the company’s creditors and the company can enter into liquidation voluntarily. At this point, the insolvency practitioner will appoint a liquidator to sell off the company’s assets.

Voluntary liquidation differs from compulsory liquidation, which is a form of liquidation initiated by a company’s creditors due to non-payment. Compulsory liquidation has significant risks for company directors, including the possibility of facing wrongful trading charges.

Companies that are liquidated, whether voluntarily or through compulsory liquidation, are struck from the register and closed. The proceeds of the liquidation sale are distributed to unsecured creditors such as suppliers, lenders, contractors and, in some cases, employees.

What are the benefits of voluntary liquidation (voluntary insolvency)?

Entering into voluntary liquidation is a serious step that will result in the dissolution of your company. However, there are several benefits of voluntary liquidation, compared to other insolvency procedures and outcomes:

  • The company directors face a significantly lower risk of being charged with wrongful or fraudulent trading in a CVL than in compulsory liquidation, particularly if they take action as soon as they realise the company is insolvent.

  • Unsecured creditors, such as suppliers and some lenders, will be paid from the funds raised through the liquidation sale. This means that creditors will receive some form of payment, even if it’s only a percentage of what they are owed.

  • Relationships with creditors may be at least partially preserved, whereas the compulsory liquidation process can result in a total breakdown between a company and its creditors.

Learn more about the compulsory liquidation process in our Guide to Compulsory Liquidation.

What are the disadvantages of voluntary liquidation (voluntary insolvency)?

There are also downsides of voluntary liquidation. These include the end of a company’s trading life (including the usage of its branding), the fact that voluntary liquidation is a public event and the potential for wrongful trading charges if the directors delay taking action after insolvency.

Despite these disadvantages, voluntary liquidation through a CVL is almost always a preferable option to allowing a creditor to wind up your company through the court.

Learn more about the advantages and disadvantages of voluntary liquidation in our Guide to Creditors’ Voluntary Liquidation.

Alternatives to voluntary liquidation (voluntary insolvency):

If your company is insolvent but potentially viable, you may be able to avoid liquidation using an insolvency procedure. Some of the most frequently used and effective insolvency procedures for distressed companies are listed below:

  • If your company has some cash flow and is potentially viable but needs help paying off its debts, it may be able to propose a Company Voluntary Arrangement with its creditors to repay some or all of its debts through an installment plan.

  • If your company is under pressure from its creditors and needs to restructure in order to reduce costs and improve cash flow, it can shield itself from compulsory liquidation using administration.

  • If your company has assets and a core business that you would like to preserve, there is a possibility that some parts of the company can be sold through pre-pack administration to a third party or the company’s existing directors.

  • If your company has reasonably steady cash flow and is viable but needs cash to pay its creditors, it may be able to improve cash flow using invoice factoring, invoice discounting or an emergency loan.

Get confidential advice from our expert insolvency practitioners

Does your company have financial issues that you’re concerned about? Is your company cash flow or balance sheet insolvent? As company director, you need to take action if your company is insolvent or at risk of running out of cash.

Our experienced team of insolvency practitioners have assisted hundreds of UK companies with cash flow issues and serious financial problems. Many of these companies have been able to avoid liquidation using Company Voluntary Arrangements and other insolvency procedures.

We can analyse your company’s finances to determine the best solution for financial recovery or liquidation. Our team works to maximise the interests of your company’s creditors while focusing on potential recovery options as much as possible.

Contact us to speak to an experienced insolvency practitioner and learn more about the options available to your company.