The terminology used can be very confusing and it is important to understand the difference.

Insolvency is the state of the financial affairs of a company (or individual). A company can be insolvent but it is not in liquidation. Liquidation is a process whereby a company is taken out of the hands of the directors and placed in the hands of an independent liquidator. The purpose of the liquidation is realise the assets of the company and make a distribution to creditors and in some circumstances the members of the company. Another term for liquidation is winding up. Liquidation and winding up are often used interchangeably.

Is it necessary for a company to be insolvent to be placed in liquidation? No, it is not. There is a liquidation process, called a members’ voluntary liquidation, which is conducted if and only if the company is insolvent.

Liquidations fall into two main categories. The first is winding up by the court or another name for it is compulsory liquidation. This is a court process and commences following a petition to the court for the winding up. The petition is normally bought by a creditor. If the petition is granted then the court issues a court order placing the company in liquidation. The liquidation commences on the date the petition is presented. A compulsory liquidation order can be rescinded and the company can be taken out of liquidation given the right circumstances (such as the company returning to solvency).

The second category is voluntary liquidation. There are two types of voluntary liquidation one is called a members’ voluntary liquidation and the second is a creditors’ voluntary liquidation. In both instances, the members will pass a special resolution to wind up the company at a general meeting (i.e. the company decides to voluntarily liquidate). This resolution cannot be rescinded and the liquidation commences at the date and time the resolution is passed. A liquidator is appointed in both instances, for a members’ voluntary liquidation this is done by the members and for a creditors’ voluntary liquidation second by the creditors at a meeting of creditors (which follows within 24 hours after the general meeting). A members’ voluntary liquidation can only be undertaken if the company is solvent and the company either has no liabilities at the time of the resolution or all creditors will be paid within 12 months following the resolution. A creditors’ voluntary liquidation is when a company is not solvent and the creditors will not be settled in full.