For any business owner, financial difficulty can be daunting - especially when terms like insolvency and liquidation start to come up in conversation.
If you're currently struggling financially and are feeling uncertain about what these terms mean for your business, you're not alone. At McAlister & Co, we believe in making these issues clear, so you can feel confident in your next steps.
In this blog, we’ll explain the difference between insolvency and liquidation, what’s involved in each process, and how our expert team can support your business during challenging times.
What is Insolvency?
First things first, what is insolvency? According to the Insolvency Service, insolvency is a financial state that occurs when a business can no longer pay its debts as they fall due, or its liabilities outweigh its assets. It’s a red flag that signals financial distress and usually requires urgent attention.
There are two main types of insolvency:
- Cash Flow Insolvency – When a business doesn’t have enough money to pay bills, wages, or suppliers on time, even if it owns assets.
- Balance Sheet Insolvency – When a business’s liabilities exceed its assets, even if it’s managing to pay its bills for now.
However, importantly, insolvency isn’t the end of the road. With the right advice and intervention, many businesses can recover, whether through restructuring, refinancing, or formal insolvency procedures such as a company voluntary arrangement (CVA) or administration.
What is Liquidation?
Liquidation, on the other hand, is a formal legal process that involves winding up a company’s affairs and closing it down. This usually happens when a business is insolvent and there’s no viable way to rescue it.
During liquidation, a licensed insolvency practitioner is appointed to:
- Sell the company’s assets
- Repay creditors as far as possible
- Handle any outstanding legal or financial matters
- Close the company and remove it from the Companies House register
Understanding the differences between the types of liquidation can help directors make informed decisions based on their company’s financial situation and long-term goals. Here’s a closer look at the three main types:
Creditors’ Voluntary Liquidation (CVL)
Initiated by directors when a company is insolvent and cannot continue, a creditors’ voluntary liquidation is the most common form of liquidation for insolvent companies. It’s initiated voluntarily by the directors when the company is unable to pay its debts and there’s no reasonable prospect of recovery.
When is a CVL used?
- The business is insolvent and cannot continue trading.
- Directors want to avoid compulsory liquidation and take control of the process.
- It’s clear that closing the business is in the best interests of creditors.
What does the process involve?
- A licensed insolvency practitioner is appointed to manage the liquidation.
- Business assets are sold and distributed to creditors in a legally defined order.
- The company is struck off the Companies House register once the process is complete.
A CVL allows directors to fulfil their legal obligations, bring closure to financial difficulties, and avoid further creditor action.
Compulsory Liquidation
Compulsory liquidation is a court-ordered process that typically occurs when a creditor petitions to have a company wound up because it hasn’t paid its debts. Learn more about compulsory liquidation here.
When is compulsory liquidation used?
- A creditor is owed £750 or more and has unsuccessfully tried to recover the debt
- A winding-up petition is served, and the court agrees the company should be liquidated.
What happens next?
- The Official Receiver is initially appointed as liquidator to investigate the company’s affairs.
- The court may later appoint an insolvency practitioner to manage the process and realise assets.
- Directors lose control of the business immediately once the order is made.
This type of liquidation can be distressing, and may reflect poorly on directors. However, taking action early with a CVL can often prevent this outcome.
Members’ Voluntary Liquidation (MVL)
A solvent liquidation - also known as a members’ voluntary liquidation - is a procedure used to close down a company that no longer needs to operate. Unlike the above, an MVL is a procedure for solvent companies - those that can pay all their debts in full within 12 months.
When is an MVL used?
- The directors want to close the business in an orderly and tax-efficient way.
- The company has fulfilled its purpose, such as in the case of retirement or restructuring.
How does it work?
- Directors must make a statutory declaration of solvency.
- A licensed insolvency practitioner is appointed to wind up the company, sell assets, and distribute funds to shareholders.
- MVLs can offer tax advantages, including access to Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).
An MVL is a positive exit strategy and is often used in planned closures or group restructures.
Insolvency vs. Liquidation: What’s the Difference?
To put it simply, insolvency is a financial condition, or a warning sign that a business is in trouble, whereas liquidation is one possible outcome of insolvency, and is the process of closing down and distributing assets.
It’s important to remember that not every insolvent company has to go into liquidation. With the right support, there may be alternative ways to turn the business around, which allows trading to continue while addressing debts.
The best way to think of insolvency is as a fork in the road: one route leads to recovery, the other to closure. Liquidation is the final step if recovery isn’t possible or desired.
What Happens During Insolvency?
So, what happens during insolvency? When a business becomes insolvent, the directors must act swiftly and responsibly. Continuing to trade while knowing the business is insolvent can result in serious consequences, including personal liability.
Here’s what typically happens during the insolvency process:
- Warning signs appear – Missed payments, cash flow problems, mounting debt.
- Directors seek advice – From a licensed insolvency practitioner.
- Options are explored – Including informal arrangements, a CVA, administration, or liquidation.
- A decision is made – Based on the best outcome for creditors and the business.
Throughout this process, acting early can make a huge difference. The sooner you seek advice, the more options you have available.
What Happens During Liquidation?
Following business insolvency, if liquidation ends up being the chosen or required route, the process looks like this:
- Appointment of a liquidator – A licensed insolvency practitioner is appointed to manage the process.
- Asset valuation and sale – Business assets are identified and sold.
- Creditor repayment – Funds are distributed in a strict legal order.
- Company closure – Once all matters are resolved, the company is dissolved.
While liquidation might sound final, it can also provide relief. It stops creditor pressure, ends the stress of ongoing financial issues, and allows directors to move on.
How McAlister & Co Can Help
At McAlister & Co, we understand how distressing it can be when your business is struggling. Our team is here to support you with empathy, clarity, and practical advice. Whether you’re worried about insolvency or considering liquidation, we can help you make the right decisions for your future.
Our services include business recovery advice, CVAs and administration support, liquidation services, Time to Pay negotiations with HMRC, and business turnaround and restructuring strategies
We're not here to judge - we're here to help you find a way forward, whether that means fighting for survival or planning an orderly closure.
So, if your company is:
- Struggling to pay bills or wages
- Facing pressure from creditors or HMRC
- Unable to get new finance
- Experiencing poor cash flow
...then now is the time to seek advice. The earlier you act, the more options you’ll have - and the greater the chance of saving your business.
Navigating financial difficulty can be overwhelming, but you don’t have to face it alone. At McAlister & Co, we’re committed to helping businesses like yours find the best path forward.
If you’re confused about the difference between insolvency & liquidation, or want to understand more about the liquidation process, contact us today for a free, confidential consultation.