Liquidation and Insolvency: What You Need to Know

Both liquidation and insolvency may be options you have considered for your business, but are you struggling with the intricate details, specifications and how it works for businesses?

In this informative post, we provide all the information you need around both insolvency and liquidation.

Let’s begin with insolvency.

What is insolvency?

Insolvency is when a business cannot pay debts or other outgoings on time or in full, it a business is in this situation it is referred to as insolvent. Commonly insolvency can be seen similarly to bankruptcy for businesses. However, a company is insolvent when its debts outweigh all assets, or when outgoings can no longer be met.

If a company is insolvent then it has a few options available to it, one of these is Liquidation which is used when there is no prospect of the business recovering.

What is liquidation?

The liquidation process is where a company sells their assets to turn them into cash which can then be distributed.

Then, directors and stakeholders confirm the company has to close, all long-term relationships have been severed, and obligations have been dealt with, the business’ assets are liquidated and according to UK law, this must be handled by a licensed Insolvency Practitioner.

Although, this is where the more intricate part begins

If your business is solvent and debts are satisfied, the proceeds are distributed among members, which will commonly be the shareholders and directors. If the company is insolvent, the top priority is paying off creditors even if there is nothing left to be distributed to members.

To be prepared, the company’s assets may be liquidated during the winding up stage, but it is more common for such things as equipment and the building and/or land to be liquidated once winding up is complete.

Only a professional Insolvency Practitioner (IP) is qualified to liquidate a company’s assets due to the complicated and specific nature of UK law and the variables involved.

What is the difference between insolvency and bankruptcy? 

Bankruptcy is actually a type of insolvency. However, bankruptcy is applied to an individual, rather than a business. But businesses can use this option depending on the situation. Furthermore, insolvency is more related to a type of financial failure, whereas bankruptcy is a legalised process.

In terms of specific insolvency proceedings you can take as a business, you can find out more, here.

How liquidation and insolvency work hand in hand

In terms of liquidation processes, there are two insolvent liquidation processes you need to know about.

The two insolvent liquidation types

Compulsory liquidation 

This is where your company is forced closure of against your will. The insolvency of a company is usually shown by the inability of a company to pay those who are owed money by the time they are due for payment.

Compulsory Liquidation, sometimes known as Winding up a company is normally led by a creditor who is pursuing the company for money.

The first formal step to a Compulsory Liquidation is a petition to wind up the company; this application is presented by the dissatisfied creditor.

Even after the Compulsory Liquidation process has begun there may still be time to follow the procedure of Creditors Voluntary Liquidation. This is initiated by the directors of the company rather than by its creditors.

Creditors’ voluntary liquidation (CVL) 

A Creditors Voluntary Liquidation is used if your company is unable to pay its creditors.

If a company is insolvent, a Creditors Voluntary Liquidation is a way of closing it. Directors themselves begin the process of Liquidation of the Company.

If a company is insolvent and has not got enough money to pay all the debts, sometimes the only course of action is to liquidate the company. A CVL is one of the most common ways for directors and shareholders to deal voluntarily with the insolvency of their company.