Question 1

What is the difference between administration, liquidation and insolvency?

Accepted Answer

**Insolvency** is a **financial state**; administration and liquidation are **formal procedures**. Confusing the state with the process is why the terms are used so loosely in reporting.

**Insolvency.** A company is insolvent if it fails either of two tests:

**Cash flow test** — unable to pay debts as they fall due.

**Balance sheet test** — liabilities, including contingent and prospective, exceed assets.

Being insolvent is a **condition**, not an event. A company can be technically insolvent and continue trading, though directors' duties shift toward creditors at that point and continuing carelessly risks **wrongful trading** liability.

**Administration.** A **rescue** procedure. An administrator — a licensed insolvency practitioner — takes control, and a **moratorium** halts creditor action, giving breathing space. The statutory objectives are ranked: rescue the company as a going concern; or achieve a better result for creditors than winding up; or realise property to distribute to secured or preferential creditors.

Administration frequently ends in a sale of the business rather than survival of the company.

**A pre-pack administration** is where the sale is arranged **before** the administrator is appointed and executed immediately after — frequently to the existing management. Legal, regulated, and persistently controversial, because the business continues while unsecured creditors receive little.

**Liquidation (winding up).** The **end**. Assets are realised, distributed in statutory order, and the company is dissolved. Three routes:

**Creditors' Voluntary Liquidation (CVL)** — directors accept insolvency and initiate it.

**Compulsory liquidation** — a creditor petitions the court.

**Members' Voluntary Liquidation (MVL)** — for a **solvent** company being wound up, frequently for tax reasons on retirement. This one is not an insolvency at all.

**Company Voluntary Arrangement (CVA).** A binding agreement with creditors to pay a proportion of debts over time, approved by 75% by value, allowing the company to continue trading.

**Receivership** is now rare for most companies.

**The order of payment** matters: secured creditors with fixed charges, then insolvency costs, preferential creditors including employees and certain HMRC debts, then floating charge holders, then unsecured creditors, then shareholders — who almost always receive nothing.

General information, not legal advice.

Question 2

How do you close a business properly?

Accepted Answer

Through a formal process appropriate to the structure and to whether the business is solvent — and the distinction between solvent and insolvent closure determines everything, including whether

Question 3

What does limited liability actually protect you from?

Accepted Answer

Less than most people assume. A limited company is a separate legal person, so its debts are its own — but there are substantial and routine exceptions, and the ones that matter most are usually

Question 4

What is a liquidation preference?

Accepted Answer

The right of certain shareholders — almost always investors — to be paid first when a company is sold or wound up, before ordinary shareholders receive anything. It is frequently the single most

Question 5

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust. Revenue (turnover). The total value of sales in a

Question 6

What are management accounts, and how are they different from statutory accounts?

Accepted Answer

Statutory accounts are prepared to a legal standard, once a year, for filing and for tax. Management accounts are prepared for you, as often as you need them, in whatever form actually helps you

Question 7

What do the three financial statements actually tell you?

Accepted Answer

Each answers a different question, and reading any one alone gives a misleading picture — which is exactly why there are three. The profit and loss account (income statement). Did we make money over

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