What’s the difference between insolvency and liquidation?

Whether you’re a director, creditor, or employee of a company facing serious financial issues, you’ve likely heard terms such as business insolvency and company liquidation.

This article explains the difference between insolvency and liquidation by answering the question; ‘Is insolvency and liquidation the same thing?’.

Is insolvency the same as liquidation?

It’s easy to assume that liquidation is the same as insolvency. However, that isn’t the case.

The answer to the question ‘Is insolvency the same as liquidation?’ is no.

For a company, insolvency is a state of being unable to repay the debts it owes to creditors.

Liquidation is the process which brings a company to an end.

While a company can be liquidated whether it’s solvent or insolvent, liquidation is more

commonly associated with a desire to stop trading as a way to resolve its financial problems because the company is no longer profitable.

What is the difference between insolvency and liquidation?

So, liquidation and insolvency are two distinct concepts, but what is the difference between insolvency and liquidation?

Insolvency, also known as business insolvency, means that a company is unable to meet its financial obligations.

In a practical sense, this can look like a company being unable to repay its debts or having assets valued less than its liabilities.

However, despite these financial issues, the company still exists and continues to trade, which is a key difference from company liquidation

Liquidation is the process of winding up or ending a company.

Unlike insolvency, when a company enters liquidation, it will stop trading and eventually cease to exist.

During this process, an appointed liquidator takes control of the company and executes the necessary steps to end it, such as selling assets, repaying creditors, and terminating employee contracts.

The two processes, liquidation and insolvency, can interact with each other if the company is ending because it is unable to meet its financial obligations.

However, insolvency is not the only motive to end a company.

For example, a solvent company can also be liquidated through a member’s voluntary liquidation.

Are there alternatives to liquidation?

Although liquidation is seen as the primary recourse for an insolvent company, it’s not the sole solution available to a company struggling with debt repayment.

A company under these circumstances can consider entering into a company voluntary arrangement, which will create a long-term debt repayment plan.

Another liquidation alternative for an insolvent company is company administration, whereby the company is controlled by an insolvency practitioner to help it become profitable.

These alternatives are designed to help companies improve their financial situation, continue trading, and avoid liquidation altogether.

Irwin Insolvency has spent more than two decades helping solvent and insolvent companies navigate the liquidation process or recover and become financially successful.

For guidance on the best course of action for your company, contact us by telephone at 0800 254 5122 or by email at mail@irwinuk.net.