Liquidation is not always the result of insolvency. In fact many solvent companies are liquidated through a members voluntary liquidation process when they wish to realise the value of large accumulated reserves in a tax efficient way.
Liquidation is the process whereby the assets of a company are realised to cover the debts of the company. Company Liquidation may be by means of:
Members Voluntary Liquidation – where assets exceed liabilities
Creditors Voluntary Liquidation – where there are insufficient assets to cover the liabilities. A Liquidator is appointed to administer the liquidation of the company’s assets and to distribute the proceeds to creditors in accordance with law
There are also Court Liquidations. This process may be instigated by a creditor seeking to recover monies owed. This would come under the heading of “Involuntary Liquidation”
Insolvency is the term used to describe a company’s situation – i.e. a company is insolvent when it is unable to meet it’s debts when they fall due, and/or when their liabilities exceed their assets.
A company may be “cash insolvent” but have assets which exceed their liabilities. In this case additional funds may not be possible to source and therefore the members will be required to “liquidate” their assets to meet their debts – i.e. liquidation
A company is “balance sheet” insolvent when their liabilities are greater than their assets.
So, in summary the term “insolvent” is used to describe a situation where a company is unable to continue to trade and therefore requires to go through a liquidation process – i.e. realise the value of their assets to pay off their debts.
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