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Why is voluntary insolvency generally preferable to compulsory?

We are sometimes contacted by directors who have received letters advising of an application or proposed application to court (also known as a winding up petition) to force their company into liquidation. If formal insolvency is inevitable, why not simply allow such an application to proceed?

There can be a number of reasons…

Stress for company directors

It can take months of aggressive letters and visits before a court hearing takes place and the company is actually wound up – whereas placing a company into an appropriate voluntary insolvency process can take from as little as a few days.

Risk for directors

Continuing to trade an insolvent company can result in directors incurring personal liability for a number of offences (some of which are deemed criminal and can result in imprisonment).

Concerns from a director conduct point of view

The directors are effectively forcing a creditor to incur the expense of court proceedings when the directors could be more proactive in dealing with the company’s difficulties. This will be taken into consideration when the Insolvency Service consider whether to seek director disqualification.

Trading difficulties

A winding up petition is advertised following which the company’s difficulties become public knowledge and its bank accounts might be frozen. In addition, transactions which take place following the petition can be void, causing risk to both the company and the recipients of any payments or goods.

Narrowing options

Seeking early advice from a licensed insolvency practitioner often makes a turnaround/rescue more viable – when the company’s difficulties are public knowledge and its bank accounts frozen, its options can become very limited.

Enhanced costs/reduced return to creditors

Petition costs and Official Receiver’s fees can result in a reduced return to creditors where a company has assets available for distribution to creditors – particularly if an insolvency practitioner is subsequently appointed liquidator and a liquidator’s fees are payable in addition.

Lack of pre-liquidation review of the company’s affairs

This can uncover potential issues and other options for the company to facilitate its rescue.

If you have any questions relating to the above or any clients who might benefit from a free, no-obligation consultation with one of our licensed insolvency practitioners, please do not hesitate to get in touch.

David Perkins

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