There is not much difference between the two.  Many companies that go into liquidation are insolvent, apart from those companies placed into Members’ Voluntary Liquidation.  To understand the differences between the two, we should first look at the definition of insolvency: ‘insolvency is the situation where an entity cannot raise enough cash to meet its obligations.’

In determining whether your company is insolvent or not, you need to look at whether there is capital available to pay debts when they fall due for payment.  Not all debts require payment at once, it comes down to terms imposed by suppliers, banks, utility suppliers, HMRC and in some cases landlords.  If you are unsure of when payments are due, they will be set out as follows:

Trade suppliers

Terms and dates for payment will be set out in their terms and conditions which are usually sent to you when you open a credit account, or, dates will be given on invoices where a credit account is not in place.

HMRC (PAYE/NI)

All monthly deductions must be paid to HMRC by the 19th of each month following deduction.

Utility suppliers

when your company opened an account with a utility supplier, you will have selected to pay monthly or quarterly – from the date the account was opened.

Bank/lenders

overdrafts are repayable upon demand, they can be recalled at any time. However, other loans will have the monthly payment dates specified in the agreement. The total amount of the loan can be requested if monthly payments are missed.

When deciding if your company is insolvent or not, rather than look at the accumulated debt it is important to instead, look at the dates for payment of each.  If debts cannot be discharged by the due dates then, you, or your company are insolvent.

For a Director of a limited liability company, the issue of your company being insolvent, or not, is of high significance.  If upon concluding that the company is insolvent, and yet you continue to trade, you could become personally liable for all future credit that the company incurs.

If you have concerns about your company’s finance, and/or queries over continuing to trade, then you should talk to a reputable Insolvency Practitioner, who will offer clear and impartial advice regarding your current position.

Turning now to liquidation, there are many types of liquidation dealing with situations both solvent and insolvent.  It may seem strange to be looking at solvent liquidations, but legislation uses the word ‘liquidation’ for both solvent and insolvent processes. Here is a summary of the various types of liquidation:

Creditors’ Voluntary Liquidation (CVL)

  • Perhaps the most common form of liquidation.
  • A CVL is instigated where the directors have concluded that the company can no longer continue to trade, therefore, they need to take the steps to place the company into liquidation.
  • An Insolvency Practitioner will be appointed as Liquidator, and it is their responsibility to realise the assets and, where possible, to pay a dividend to the creditors.

Compulsory Liquidation

  • Where a company is wound up by the court.
  • This can happen if one of the company’s creditors loses patience with the company not paying up and applies for a winding up order to be issued.
  • When the order is made, the company is then placed into compulsory liquidation, with the Official Receiver, usually being appointed as Liquidator.
  • It is often the case, in compulsory liquidations, that the asset realisations are minimal and there is little or no return to the creditors.

Members’ Voluntary Liquidation (MVL)

  • MVL is a solvent form of liquidation.
  • In this instance the assets of a company are greater than the total of all its liabilities.
  • Usually the shareholders decide to cease trading and convert the assets into cash for distribution to them, or, in some cases for obtaining tax relief for shareholders on capital distributions.

If you have any concerns at all about you or your companies current financial situation, or how debts can impact upon your position, then please seek the advice of a reputable Insolvency Practitioner.  Contact Stewart Accounting Services today for advice and recommendations.