Page 275 - AAA Integrated Workbook STUDENT S18-J19

UK syllabus: Auditing aspects of insolvency

Insolvency and liquidation

1.1 Insolvency

There are two tests for insolvency:

1 if assets are exceeded by liabilities, or

2 if a company is failing to discharge its debts as and when they fall
due.

If a company meets either criteria then it is technically insolvent.

1.2 Liquidation

Liquidation is the process of terminating a company, thus ending its
life. The assets of the company are physically liquidated, i.e. they are
sold, so that cash can be used to pay off company creditors and equity
holders.

There are two forms of voluntary liquidation:

 members' voluntary liquidation

 creditors' voluntary liquidation

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