Inability to pay debts
A person or company is insolvent if they cannot pay their debts. A person or company (a debtor) may be unable to pay their debts if:
- They cannot pay their debts that are due to be paid now or those that will be due to be paid in the reasonably near future.
- Taking a longer-term view, they have insufficient resources to cover their actual and potential liabilities. This is not a strict mathematical exercise; all the circumstances have to be taken into account.
Bankruptcy and liquidation (or winding-up) are processes to deal with the insolvency of respectively and individual and companies (it applies also to other types of organisation, such as limited liability partnerships, but this guide focuses on the basic position for companies).
The bankruptcy process
There are 2 main ways a bankruptcy order can be made:
Alternative procedures that could help an insolvent debtor deal with their debts without being made bankrupt, include: an Informal agreement; a Debt Management Plan; an Individual voluntary arrangement (IVA); an Administration order and a Debt relief order.
The liquidation process
There are different types of liquidation:
- Compulsory liquidation: This is a court based process usually started by a creditor of the company on the basis that the company is unable to pay its debts.
- Voluntary liquidation: This is a non-court based process initiated by a shareholders' resolution. A voluntary liquidation may be either a members' voluntary liquidation or a creditors' voluntary liquidation. The difference is that a members' voluntary liquidation is a solvent liquidation (the directors of the company have to make a sworn declaration that the company will be able to pay its debts in full, with interest, within 12 months); a creditors' voluntary liquidation is an insolvent liquidation.
At the end of a liquidation, the company will be dissolved.
There are alternative procedures for dealing with a company's debts; some may allow for the company to continue as a going concern.