Insolvency vs Liquidation – Is there a difference?

There’s a short and long answer to the question of insolvency vs liquidation. We’ll cover both below – and show you how to take action to avoid both. 

The short answer is that insolvency is a state in which a company or individual can’t meet its debts on time or in full. Liquidation can be the result of insolvency but isn’t always, as we’ll show you. 

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Insolvency vs liquidation

What is insolvency?

A company is technically insolvent if its outgoings can’t be covered by its incomings, on a month-to-month basis. There are often warning signs of insolvency which might be missed – or seen and ignored. A constant reliance on extra finance like an overdraft is one. Continuously missing or having to delay payments to creditors is another. 

Our advice is never to ignore these signs. If you catch them early, we could help you reverse your position and get back into profit. The longer you take to act, the more likely it is that you’ll have to go through an insolvency process such as liquidation. 

What is liquidation?

Liquidation is a legal process that closes down a company. In the case of an insolvent company, this route is taken voluntarily because it’s the smoothest, most cost-effective way to liquidate the company’s assets and repay some or all of the money owed to creditors. 

A company liquidation is done using a Creditors’ Voluntary Liquidation (CVL) . A licensed insolvency practitioner takes control of the company during this process. Their role is to help the directors get approval for the liquidation from the creditors, arrange for the sale of the assets, distribute the fund, and handle all the legally required paperwork.

In some cases, your company might be threatened with a winding up petition which, if successful, results in a Compulsory Liquidation. If you’ve received a winding up petition, we can step in and hopefully avoid Compulsory Liquidation

If you’re closing a profitable company because of retirement or new employment, liquidation is also used. A Member’s Voluntary Liquidation (MVL)  is a quick solvent liquidation process that can extract the maximum amount of profit from your company and will tie up any loose ends with HMRC and creditors.

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Other options for insolvency vs liquidation

Liquidation isn’t the only way to close down an insolvent company. The purpose of an insolvent liquidation is to sell all your assets and repay as much of your debts as possible, then close the company. It might be that you want to restart your business under a new company. We can use a CVL to do that. There are many restrictions governing this process, which we’ve covered in our article ‘Can I liquidate a company and start again?’.

Company administration is designed to help save a company from insolvency and avoid liquidation. Once the administration has begun and the administration documents filed, you are legally protected from your creditors taking any action to reclaim money owed. It’s also at this point that a licensed insolvency practitioner is brought in and takes over control of the company from its directors. 

In the role of administrator, we’ll work with you to create a plan to repay the company’s debts and negotiate this with your creditors. This might involve selling some assets, which we’ll also take care of. The ideal outcome is that we’re able to save parts of your business and keep them in your company. 

Another alternative is to use this administration process to sell the profitable parts of your business to the company directors, who can then run it under a new company. The remaining assets are liquidated and the old company closed. This is called a pre-pack administration. You can read more about it in our dedicated article.

Professional help for insolvency vs liquidation

A licensed insolvency practitioner can give you advice from the very first warning signs of insolvency. In some cases, if you act early, the matter of insolvency vs liquidation is easily cleared up: we can help you recover from insolvency and avoid liquidation completely. 

Speak to one of our licensed insolvency practitioners and business rescue experts about your insolvency vs liquidation options.

Call us on 0800 054 6590 or request a call back