The Difference Between Insolvency, Liquidation, and Bankruptcy in Ireland

Liquidation, insolvency, and bankruptcy—these terms pop up frequently in finance. But while the 3 are often used interchangeably, it’s important to note that they’re not the same.

Here, we’ll give you a complete overview of liquidation, insolvency, and bankruptcy, explaining their processes, types, who they impact, and more.

What is insolvency?

Insolvency causes major financial trouble. For individuals, it can lead to bankruptcy, while businesses might have no choice but to restructure or shut down (liquidate).

Types of insolvency 

There are 2 types of insolvency in Ireland: 

• Cash flow insolvency: This happens when a business or person can’t pay their bills on time, even if they have valuable assets. This makes it a short-term cash problem.
• Balance sheet insolvency: This happens when a company or individual owes more than what they own. It’s a more serious, long-term problem that signals deeper financial trouble particularly when combined with negative cash flows.

Warning signs of insolvency 

Insolvency doesn’t happen overnight—here are some warning signs that danger might be near:

• Excess debt: The company or individual has more debt than assets.
• Court orders: A court has issued legal demands for debt payment.
• Creditor pressure: Creditors are persistently demanding money.
• Missed payments: Wages, rent, or taxes aren’t being paid.
• Declining sales: Revenue has suddenly dropped.
• Cash shortages: There’s not enough funds coming in to cover costs.
• Loan refusals: Banks and lenders are refusing to provide credit.

Preventative measures for insolvency

Here are some steps you can take to help prevent insolvency:

• Plan for unexpected costs: Setting aside emergency funds helps businesses and individuals handle any sudden expenses or surprises.
• Stay on top of debts: Keeping track of debts and communicating with creditors helps avoid falling behind on bills and reduces financial stress.
• Keep track of cash flow: Regularly checking cash flow helps keep spending in check and makes it easier to spot trouble early on.

The insolvency process 

When a company or person faces insolvency, they must go through a process to resolve the situation. Here’s how it works:

Step 1: Insolvency Practitioner (IP) assignment

A licensed expert called an Insolvency Practitioner (IP) steps in to take control. They carefully review the finances and determine the best course of action.

Step 2: IP’s decision:

The IP plays a big part in deciding which action to take. 

For insolvent companies, they may decide on: 

• Restructuring: If there’s still hope for the company, the IP will work on reorganising it and negotiating with creditors to reduce or defer the debts.
• Examination: The company might go into Examinership if informal restructuring doesn’t work. An examiner will often take the reins to determine how to restructure debts and keep the business running if possible.
• Liquidation: If the company can’t be saved, it will go into liquidation. The company’s assets—like property or inventory—will be sold off to pay creditors, and the business will be closed for good.

For personal insolvency cases, the IP may try the following:

A Personal Insolvency Arrangement (PIA) is a formal debt solution for people who have a mortgage and are insolvent but can still afford partial repayments after covering essential living costs.

Under a PIA:

• Some unsecured debt is written off.
• Secured debt, like a mortgage, is restructured.
• In most cases, you can stay in your home.
• Creditors included in the PIA cannot contact you for repayment.

A PIA typically lasts up to 5 years (or 6 in some cases). It must be approved at a creditors’ meeting and can be enforced by a court.

During the PIA, you are entitled to a reasonable standard of living, covering necessities like food, healthcare, and education.

At the end of the arrangement, unsecured debts are cleared, but any remaining secured debt (e.g., mortgage) must still be repaid.

Debt Settlement Arrangement (DSA): The IP will set up a DSA agreement where individuals agree to pay back less money to creditors over a longer time frame. Sometimes, the debt may be written off entirely.

Debt Relief Notice (DRN): The IP will suggest a DRN if the person has very little income or assets. This clears up all their debt after 3 years (as long as the person meets specific conditions).

Bankruptcy: If the person can’t pay their debts in any form, the IP will advise them to declare bankruptcy. 

What is liquidation?

Liquidation is the legal process of closing down a company. When a business can’t pay its debts or is being wound down for tax, restructuring, asset distribution or other reasons not involving insolvency, its assets—like cash, equipment, and property—are sold, and the business is closed. 

Types of liquidation

In Ireland, there are 2 categories of liquidation: 

1. Voluntary liquidation 

When a company’s directors or shareholders initiate a liquidation, it’s considered ‘voluntary’. There are 2 kinds of voluntary liquidation:

• Creditors’ Voluntary Liquidation (CVL): When a company is insolvent (unable to pay its debts), the directors and creditors hold a meeting and agree to close the company down.
• Members’ Voluntary Liquidation (MVL): When a company is still solvent (can afford to pay its debts) but directors and shareholders decide to close it for other reasons—for example, retirement or restructuring.

2. Compulsory Liquidation (CL)

A CL often only affects insolvent companies. It happens when creditors file a petition in the High Court asking for a company to be shut down because it has failed to pay its debts. If the court approves the petition, the company is forced to liquidate. A court can make an order for liquidation where it is equitable to do so, this article however concentrates on insolvent circumstances.

Who manages the liquidation process?

Regardless of whether a liquation is voluntary or compulsory—a liquidator will be appointed to handle the process. The liquidator’s job is simple: Sell the company’s assets—like property, inventory, and equipment—to pay off debts to creditors.

The liquidator is also tasked with reviewing the actions of the company’s directors. They ensure no wrongful or fraudulent trading could have led to the company’s closure, or seek remedy where such action has occurred.

Once liquidation is complete, the company is officially dissolved and no longer exists as a legal entity. The liquidator files all the necessary paperwork with the Companies Registration Office (CRO) to remove the business from its register formally.

How is a liquidator appointed?

How a liquidator is chosen depends on the situation: 

• Voluntary liquidation: The company’s directors or shareholders choose the liquidator based on who they think is best equipped to handle the situation. Creditors have the opportunity to ratify this appointment.
• Compulsory liquidation: The court appoints a liquidator, often nominated by the petitioning Creditor with the right qualifications and knowledge to follow the legal process.

Common triggers for liquidation of an insolvent business

Liquation can happen for a number of reasons, but some of the most common are: 

• Uncontrolled debts: The business has overdue bills or can’t afford to pay back its loans.
• Poor cash flow: The company isn’t making enough money to cover the basics—rent, wages, or supplies.
• Failure to restructure: The business hasn’t been able to secure new financial support or reach a better agreement with their creditors.
• Bad economy: A recession or economic downturn means customers can’t afford the company’s products or services anymore.
• Legal issues: The company’s resources have been drained because of lawsuits, fines, or penalties.
• Market shifts: The business’s products or services are obsolete, and their sales have dropped dramatically because of new trends in the market.

Why would a solvent company choose to liquidate?

Liquidation isn’t always a bad thing. Many solvent companies that can afford to pay their bills and loans might choose to liquidate for different reasons, including: 

• Retirement: If the owners of a solvent company are ready to retire or move on to new projects, they might close the business instead of selling up.
• The business is no longer viable: If a company has no future growth potential, it may liquidate to avoid ongoing operational costs and future liabilities.
• Merger or acquisition: Sometimes, a company may choose to liquidate as part of a larger plan to merge with (or be acquired by) another company.
• Reorganisation: A company might choose liquidation as part of a reorganisation plan in which they’re restructuring their operations.
• Efficient asset distribution: Liquidation allows shareholders to retain a degree of control over how Company assets are distributed and there are often tax efficiencies associated with assets which are distributed out of a Company in Liquidation.

What is bankruptcy?

Bankruptcy is a legal process where a person who can’t pay their debt seeks relief from the High Court. It can wipe out most debts, but the person must sell their assets to settle up as much of what they owe as possible. The defining factor of bankruptcy is that it only affects individuals—not businesses. 

What are the consequences of bankruptcy?

Bankruptcy can damage a person’s credit rating and make it hard to borrow money in the future. Also, a bankrupt individual is banned from managing or directing any company for a certain period.

How long does bankruptcy last?

Bankruptcy usually lasts between 1 to 3 years in Ireland. However, the exact length of time can vary depending on the person’s unique situation and how things have panned out with creditors.

The bankruptcy process

Here’s how bankruptcy proceedings work in Ireland: 

• Court application: The individual files a petition with the High Court to be declared bankrupt. To file this petition, they must be at least €20,000 in debt.
• Court decision: If the court agrees, they declare the person bankrupt and appoint an official receiver (often called a bankruptcy trustee) to take control of the individual’s finances and assets.
• Bankruptcy Register: The person’s name is added to the Bankruptcy Register, which affects their ability to get credit or loans in the future.
• Selling assets: The official receiver may sell some of the person’s property or belongings to help pay off their debts.
• Debt relief: After the bankruptcy period ends, most of the person’s debts are cancelled, and they have a fresh start.

How to rebuild your finances after bankruptcy

While serious consequences are involved, bankruptcy doesn’t have to be the end of the world—there’s always a way to get back on your feet. 

• Create a budget: Tracking income and expenses carefully makes it easier to keep spending within limits.
• Start saving: Setting aside small amounts for emergencies or future goals builds a financial safety net and encourages better money habits.
• Build credit slowly: Using a credit card responsibly or applying for a small loan is a good way to rebuild credit slowly.
• Pay bills on time: Ensuring all future bills and debts are paid on time will also improve credit.
• Seek financial advice: Talking to a financial advisor can guide your budgeting and financial planning to help prevent a similar situation.
• Avoid new debt: Avoiding larger loans or lines of credit until finances are stable will help you avoid more financial problems and make it easier to get back on track.
• Set financial goals: Focusing on achievable goals helps to stay motivated for the future.

Common misconceptions about insolvency, liquidation, and bankruptcy

There are many misunderstandings about insolvency, liquidation, and bankruptcy. Here are some common mistakes people make:

Liquidation is not the same as bankruptcy or insolvency

Liquidation is different from bankruptcy and insolvency. It’s when a company closes and sells its assets to pay off debts. The Company does not have to be insolvent to enter into Liquidation. While insolvency and bankruptcy may lead to liquidation, they’re separate financial issues.

Insolvency is not always permanent

Unlike liquidation, insolvency procedures don’t always mean the end for a business. With proper restructuring or refinancing, companies can recover and return to profitability.

Bankruptcy does not absolve all debts

Bankruptcy can wipe out most debts, but some obligations—like child support or certain fines—aren’t covered and must still be paid.

Key takeaway 

Insolvency, liquidation, and bankruptcy are often mistaken for the same thing. Still, each term represents a separate stage or aspect of dealing with financial distress and has its process, rules, and consequences.

• Insolvency happens when a person or a company can’t pay their debts. It’s often the first step toward either liquidation (for businesses) or bankruptcy (for individuals).
• Liquidation is closing down a company, selling its assets to pay off debts, and officially dissolving it from the register..
• Bankruptcy allows individuals to seek debt relief through the court. It often results in a fresh financial start (with a few restrictions) after selling off assets and wiping out most of their debts.