Understanding the difference between insolvency and liquidation is important if your business is facing difficulties.
Insolvency is broadly when a company is unable to meet its liabilities. This could be either:
- Cash Flow Insolvency: when there is insufficient money available to pay debts, even if there are assets that are tied up in the business
- Balance Sheet Insolvency: when liabilities exceed assets
If a company is insolvent, it is an offence for the directors to keep trading unless they reach an agreement with creditors or enter into a company voluntary arrangement.
If you believe that your company may be insolvent, you should take expert insolvency advice as soon as possible to ensure that you do not inadvertently break any rules.
An insolvency practitioner will be able to advise you of your options and work with you to attempt a rescue if this is possible.
How Does Liquidation Differ from Insolvency?
Liquidation is the process of selling off assets and ending trading. It can follow insolvency, or it might be as a result of a decision to close a solvent business, known as a members’ voluntary liquidation.
Other types of liquidation are:
- Creditors’ Voluntary Liquidation: if the company cannot pay its debts and is under pressure from creditors
- Compulsory Liquidation: which follows a court order made after a winding-up petition is presented to the court
An insolvency practitioner is used during liquidation to ensure that the process of realising assets is carried out fairly and that the creditors’ and shareholders’ best interests are observed.
For more information, see our article explaining the different types of insolvency.
The Benefits of Liquidation
Liquidation, when compared to insolvency, offers the following benefits:
- Clearing debts
- Legal protection from creditor actions
- Closure
- Fulfilment of fiduciary duty
- A fresh start for directors
- Compliance with legal obligations
- Minimising personal liability
However, it does come with the loss of the business and potential job losses. The choice between liquidation and insolvency will depend on the company's unique circumstances.
Insolvency Practitioner vs Liquidator
An insolvency practitioner is licensed to carry out a range of duties for a company. Their priority is to protect assets for creditors but they can also advise on business rescue. They will take control of the business and if it can continue trading, will be in charge of dealing with its day-to-day operation. They will also have control of the company’s accounts and be able to pay bills and authorise expenditures where appropriate.
They can also act as a liquidator, selling assets for the best possible price to pay off the company’s creditors.
The insolvency practitioner also has the power to look at the way the business was run and whether there were any unlawful acts on the part of the directors. The practitioner must report any misconduct to the Insolvency Service.
A liquidator has a narrower role and is only involved with collecting money owed to a company, selling assets for the best price and investigating the company to check for misconduct. Again, if found, this must be reported to the Insolvency Service. They will also monitor the winding-up process to ensure that the creditors’ best interests are observed.
What to Do If a Company is Insolvent
If you believe that your company may be approaching insolvency, you are strongly advised to engage an insolvency practitioner without delay. This can prevent wrongful trading while insolvent and also give you the expert advice and support you need at a difficult time. An insolvency practitioner will have a raft of sound advice and will usually be able to prevent a situation from degenerating quickly.
Having the guidance and input of someone who understands insolvency will help you navigate the process more easily and ensure that rules and regulations are not broken. It will also reassure your creditors knowing that their interests are being prioritised and that they will recover as much as possible from the process.
Progressing to Liquidation
If it becomes apparent that your business cannot be rescued, your insolvency practitioner will start the liquidation process. They will deal fairly with your business and its creditors, ensuring that the assets achieve a reasonable price and that debts are paid in order of priority.
While this can be a distressing time, having the support of an expert practitioner who is used to helping directors through liquidation will make matters as easy as possible.
We offer a full range of insolvency and liquidation services. For further information, see our insolvency and bankruptcy solicitors page.
Contact our Insolvency and Liquidation Solicitors
At Witans Solicitors, we have exceptional experience in dealing with insolvency and have supported hundreds of clients through this difficult process. We understand the pressure you will be feeling and will work with you to ensure that you have the help and guidance you need.
If you would like to speak to one of our expert insolvency and liquidation lawyers, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help.
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