The difference between liquidation and insolvency

It is a common misconception that a company in liquidation must be insolvent. Quite often this is the case but it’s not the only scenario where a company goes into liquidation. Members Voluntary Liquidations (“MVL”), also referred to as solvent liquidations, are used where a company for whatever reason has come to the end of its useful life. The process itself is almost identical to a Creditors Voluntary Liquidation (where the company is insolvent), the key difference being that the director(s) swear a declaration of solvency, confirming that the company is solvent and able to pay all of its debts in full.

There are many benefits to a Members Voluntary Liquidation, from a shareholders perspective 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 like Gibson Hewitt Limited.

Insolvency on the other hand is defined in Section 123 of the Insolvency Act 1986. The two tests are:

  1. “…that the company is unable to pay its debts as they fall due.”
  2. “…that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.”

Seeking professional advice at an early stage is the key to maximising recoveries for shareholders in a solvent business situation. It is arguably even more important in a potentially insolvent business situation, where 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 protection of being a director of a “limited” company really is “limited”! Actions could be taken against the director(s) for wrongful trading, fraudulent trading, or misfeasance to name a few. If in doubt, seek professional advice!

The options available to directors are not as simple as insolvent = liquidation, nor are they as simple as liquidation = insolvency.

Contact us today for a free consultation on 01932 336149.