What Is The Difference Between Insolvency And Liquidation?

Fast Fact

Insolvency is a state of financial affairs whereas liquidation is a formal insolvency procedure set out in the Insolvency Act 1986. Two very different things.

What Is Insolvency?

Insolvency as a state of being. In other words, you either are insolvent or you’re not. It’s usually a question of fact.

An insolvency is about two things. It is either based on the inability to pay debts when they fall due or your assets are exceeded by liabilities.

It is possible to be unable to pay your debts when they fall you and have more assets than liabilities.

For insolvency is either or position ie. either of those issues arises and technically speaking, you’re deemed to be insolvent.

What Is Liquidation?

Liquidation is very different because liquidation is a legal procedure set out in the Insolvency Act 1986 to deal with insolvent companies.

It is an orderly winding up of a company through the appointment of a liquidator who will realise the assets, pay the costs of the liquidation process and then make payment of any surplus as required in accordance with the rules on the order of payment.

Insolvent Liquidation

There are two types of liquidation for insolvency or companies that are insolvent.

Which one is perhaps the most common creditors voluntary liquidation, where the directors put the company into liquidation.

The other is compulsory liquidation, which is more typically when the creditors take enforcement action against the company and obtain a winding up order from the court that the company be formally wound up and placed into compulsory liquidation. The official receiver is appointed as liquidator in the first instance.

Solvent Liquidation

It is also available to deal with solvent companies as a specific procedure for dealing with members voluntary liquidation.