These 3 terms are often used interchangeably, but they are different. Let’s unravel any confusion.
Whilst both Bankruptcy and Insolvency are formal ways in dealing with debts and can have an impact on your financial future, bankruptcy is a form of insolvency, but not all insolvency will lead to bankruptcy.
Bankruptcy is a legal process undertaken by an insolvent individual, rather than a limited company. Bankruptcy simply provides the legal framework for addressing and managing debts.
Insolvency is a blanket term, used to describe an insolvent person or a company that is unable to repay its debts. Insolvency encompasses many different procedures, but they are used when a business is in financial difficulty.
Liquidation is a process undertaken to close a company. Depending upon whether the business is insolvent or solvent and your specific situation, will affect the type of liquidation route.
An insolvent company means it can no longer afford to cover its liabilities, whereas a solvent company is still able to trade and meet its liabilities, but the director(s) wishes to close the business.
Let’s look at the 3 main forms of liquidation:
(i) Creditors Voluntary Liquidation (CVL) – Insolvent company
A CVL is a means for a director to voluntarily close the limited company when there is no real prospect of rescue/recovery. This process can remove the stress caused by the mounting debts and prevent any potential legal action.
(ii) Compulsory Liquidation – Insolvent company
A Compulsory Liquidation is not a voluntary option but is ordered by the Court (winding up order) and is usually the last resort for a creditor to get paid. A government representative, known as an Official Receiver (OR), is appointed liquidator and immediately takes control of all aspects of your company.
(iii) Members Voluntary Liquidation (MVL) – Solvent company
All creditors are paid in full, and this process is a cost-efficient way to cease trading and close the business. This could be used in retirement situations or changes in career.
If your company is in financial distress then Smith & Barnes’ free confidential consultation will set out all your options, giving you impartial and straight forward advice from the start.
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