What is the difference between insolvency and liquidation?

Are company insolvency and liquidation the same thing?

The terms liquidation and insolvency are often used to describe limited companies in a state of financial distress, but they both have distinct meanings. 

Here we outline the differences between company insolvency and liquidation, the various liquidation procedures and the steps you can take if you think your company is insolvent.  

What is insolvency?

Insolvency refers to a business that can no longer pay its debts. Your limited company is technically insolvent when it cannot pay its bills when they are due and/or the total value of its assets exceeds its liabilities. 

An insolvent company is in serious financial distress and requires urgent professional assistance, but it doesn’t necessarily mean it’s the end of the business. With the help of a licensed Insolvency Practitioner, there may be informal and formal methods you can use to rescue the company and continue trading. 

What is liquidation?

Liquidation is the name given to a group of procedures used to close a limited company. When you liquidate a company, you must appoint a licensed Insolvency Practitioner to close the business on your behalf.

Acting as the liquidator, they take control of the company, wind up its affairs and sell any physical assets it owns, such as property, machinery and vehicles, to raise money. If the company is insolvent, the liquidator uses that money to repay the parties the company owes money to (its creditors). If the company is solvent, the liquidator pays the profits to its shareholders.   

Insolvency vs. liquidation - what are the main differences?

Can you continue trading?

• Insolvency - When a company is insolvent, you must seek professional advice from an Insolvency Practitioner. They may allow you to continue trading if there’s a realistic prospect of turning the company around or continuing to trade temporarily will increase the return for the creditors.
• Liquidation - A company must cease trading when it enters liquidation. The liquidator will resolve any ongoing contracts or disputes, make staff redundant and sell the company’s assets. They then remove it from the official register, effectively ending its existence.

How long does it last?

• Insolvency - A company cannot be insolvent for the long term. Once it becomes insolvent, you must resolve the situation one way or the other, either by rescuing it or closing it down.
• Liquidation - Liquidation is a formal procedure that usually takes three to 12 months to complete. The timeframe depends on the company’s size, the complexity of its financial affairs and the type of liquidation. 

How does it end?

• Insolvency - Insolvency does not always lead to the closure of a company. It may be possible to rescue it if it has a viable business model and could return to profitability. That could be through informal measures, such as refinancing and payment plans with creditors, or formal insolvency procedures, like a Company Voluntary Arrangement (CVA) or Administration.
• Liquidation - Once initiated, liquidation almost always leads to the company’s closure.  

What role do the directors play?

• Insolvency - As a company director, you must consult with an Insolvency Practitioner (IP) as soon as you know the business is insolvent. You can rescue or liquidate the company based on the IP’s professional advice and recommendations.
• Liquidation - In most cases, directors liquidate their companies voluntarily. You hand over control of the business to an Insolvency Practitioner who liquidates the company on your behalf. However, you must cooperate with them by providing company records and attending meetings and interviews as required. 

What are the different types of liquidation?

There are several liquidation procedures you can use to close a limited company. The right one for you will depend on your financial situation. 

Members’ Voluntary Liquidation (MVL)

If your company is solvent and can pay all its debts, you can use a Members’ Voluntary Liquidation to close it. Common reasons for using this procedure include retiring and having no one to carry the company on, wanting a new challenge or simply having no more use for the business.  

In a Members’ Voluntary Liquidation, the liquidator sells the company’s assets and distributes the proceeds and any retained profits among the shareholders. They then remove it from the Companies House register. 

Creditors’ Voluntary Liquidation (CVL)

When a company is insolvent, you can liquidate it voluntarily via a Creditors’ Voluntary Liquidation. You must call a shareholder meeting to pass a resolution to wind up the company. You then appoint an Insolvency Practitioner to act as the liquidator. 

In this process, the liquidator uses the proceeds from the sale of assets to repay the creditors according to a pre-determined hierarchy. Any debts they cannot repay are usually written off and the company is closed. 

Compulsory Liquidation

It’s not only the directors of an insolvent company who can put it into liquidation. The company’s creditors can also petition the court to wind up the company if it does not pay its debts. If the court agrees with the petition, it can make a Winding Up Order to force the company into Compulsory Liquidation. 

The court will appoint an Official Receiver to wind up the company and repay the creditors as much as possible before it is closed. This procedure can bring additional risks for the directors, as it suggests you have failed to address the company’s financial difficulties in a timely manner.

How do I liquidate my company?

If you’re worried your company is insolvent or you want to liquidate so you can retire, our experienced team of licensed Insolvency Practitioners can help. We will assess your company, explain your options and guide you on the best route forward. We can also handle the liquidation process from start to finish while helping to protect your interests throughout. Please get in touch for a free consultation or arrange an in-person meeting at your nearest office.