Inability to pay debts

A person or company is insolvent if they're unable to pay their debt. This means either that they can't pay debts that are due immediately and/or that they do not have any prospect of paying those debts that will become due in the reasonably near future.

Bankruptcy and liquidation (or winding-up) are processes that respectively deal with the insolvency of individuals and companies (including other types of organisation, such as limited liability partnerships, although this guide only deals with the basic position for companies).

The bankruptcy process

There are 2 main ways a bankruptcy order can be made:

• The debtor (someone unable to pay their debt) can apply online to an adjudicator to have themselves made bankrupt.
• The creditor (someone that is owed money) can apply to court for the debtor to be made bankrupt.

To avoid bankruptcy an insolvent debtor can instead use alternative procedures such as:

• An Informal agreement
• A Debt Management Plan
• An Individual voluntary arrangement (IVA)
• An Administration order
• 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 that may allow the company to continue as a going concern.