Are liquidation and insolvency the same thing?

Insolvency

It is a common misconception that a company in liquidation must be insolvent.

Jason Elliott, of The Insolvency Experts, explains that whilst quite often it is the case that a company in liquidation is insolvent it is not always.

Table of Contents

• What types of Liquidation are there?
• What are the benefits of a Liquidation?
• What are the differences between Liquidation and insolvency?
• How do I move forward with a Liquidation?

What types of Liquidation are there?

Members Voluntary Liquidations (MVLs), are used where a company for one reason or another has come to the end of its useful life but is still solvent.

For example, it could be due to the fact that you want to retire; you want to step down from the family business and nobody else wants to run it or you simply don’t want to run the business anymore.

Whilst the process itself is almost identical to a Creditors Voluntary Liquidation (CVL) where the company is insolvent, the key difference is that that the directors swear a ‘declaration of solvency’. This confirms that the company is solvent and able to pay all of its debts in full.

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What are the benefits of a Liquidation?

From a shareholders perspective there are many benefits to a Members Voluntary Liquidation. It provides a mechanism for distributing funds in a tax efficient manner.

It also provides finality for directors, ensuring that all issues are dealt with and the company dissolved with the oversight of a Licensed Insolvency Practitioner.

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What are the differences between Liquidation and insolvency?

So, the message is, liquidation and insolvency are not the same and don’t always go hand in hand. Insolvency is defined in Section 123 of the Insolvency Act 1986.

The criteria are that the company is unable to pay its debts as they fall due and that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

If you are considering an MVL then seeking professional advice at an early stage is the key to maximising recoveries for shareholders in your solvent business.

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How do I move forward with a Liquidation?

If you are concerned that your business is in financial distress and heading for potential insolvency it is arguably even more important to seek the advice of an Insolvency Practitioner as the directors could find themselves personally liable if they have not taken the steps deemed necessary to fulfil their responsibilities as directors.

Once a company is insolvent, the implications for directors can be serious and actions for wrongful trading, fraudulent trading, or misfeasance to name a few could be taken. It is imperative you seek professional advice immediately.

For more information on liquidation and/or insolvency, contact Jason Elliott at The Insolvency Experts. He will provide confidential, honest advice and can be contacted on 0300 303 8284 or at enquiries@theinsolvencyexperts.co.uk.

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