Differences between necessary and voluntary insolvency proceedings

The differences between necessary and voluntary insolvency proceedings are significant, both in terms of form and substance. In this article, we provide more details on each case in order to better distinguish between them.

Necessary and voluntary insolvency proceedings, characteristics and differences

Insolvency proceedings, as a legal concept, occur when a company (or individual) is in a situation of insolvency. There are certain indicators, such as liquidity, which can indicate the real state of the company and, thus, enable decisions to be taken.

The truth is that insolvency legislation favours the possibility of voluntary insolvency. And this is an option that is generally preferable. However, certain deadlines must be followed and, above all, it must be determined when the insolvency becomes known.

However, it is the moment of the request and, above all, who requests it, that will differentiate the deadlines, the administration’s room for manoeuvre and the legal consequences. Let’s take a look…

Necessary and voluntary insolvency proceedings: necessary insolvency proceedings

Necessary insolvency proceedings occur when they are requested by creditors, one of the partners or the administration. In this case, it is the judge who takes the precautionary measure, precisely to safeguard the interests of the injured parties.

In the case of insolvency proceedings, the company’s management ceases to perform its functions. The consequence is that it is replaced by an insolvency administration. This means, therefore, that the owners of the company completely lose control over the company. It should also be noted that in an insolvency proceeding, creditors who request insolvency proceedings have preference over other creditors.

Finally, it should be noted that, beyond any civil or criminal liability, poor management is assumed. And this, when it comes to taking other types of decisions, works against the owners.

Voluntary insolvency proceedings

Voluntary insolvency proceedings are initiated at the request of the company’s administrators. The aim is to stabilise the company and limit the level of liability. A tax or business advisor should recommend this option when necessary.

Firstly, voluntary insolvency proceedings do not remove the ability of the administrators or owners to manage the company; however, the court will appoint an insolvency administrator who will have to be accountable for the company’s movements. Here, in principle, the order of priority in collections for creditors will be the default order.

And, in principle, when the insolvency proceedings are voluntary, good faith on the part of the administrator is assumed. And this is especially relevant, because in the event that the liquidation phase is reached, it is more likely that the insolvency proceedings will be considered fortuitous and not guilty, reducing the equity liabilities of the owners.

To sum up…

The most important thing to know when differentiating between necessary and voluntary insolvency is that, if you have suspicions of insolvency, you have to act as soon as possible. At Asesoría Orihuela Costa we provide specialised help to the self-employed and companies, contact us to find out more about our services!