BANKRUPTCY AND LIQUIDATION

This is a legal procedure which allows individuals freedom from their debts, whilst providing creditors with an opportunity for repayment.

It is undertaken via the courts where the Official Receiver (see above) will initially administer the procedure but, depending on the circumstances of the case, may well appoint an Insolvency Practitioner.

Although debtors can self-refer and apply to become bankrupt online, we strongly recommend against filing for bankruptcy without seeking professional help.

The liquidator’s role also includes taking over from the company directors and investigating the company’s affairs to work out what went wrong. He or she will sell off the company’s assets in order to pay off the business’s debts.

Liquidation can be voluntary or involuntary. Voluntary liquidation usually happens after a resolution by members or creditors, who can vote for the liquidation after the company has gone into voluntary administration and/or when a Deed of Company Arrangement is terminated. Liquidation can also be initiated by the company’s shareholders deciding to liquidate the company. Involuntary liquidation, on the other hand, usually happens by court order.

DIFFERENCES:

The most important distinction between liquidation and bankruptcy is that liquidation is for companies and bankruptcy is for individuals. Bankruptcy is a legal state where an individual is declared insolvent, with certain legal consequences, while liquidation is a means or tool to shut down a company in an orderly way.

While bankruptcy status remains on a public record (the NPII) forever, it’s not a permanent state of affairs as it lasts only three years. In contrast, liquidation leads to a permanent outcome: it’s the “end of the road” for a company as assets are sold off and the company structure dismantled with no possibility of returning to operations.

Bankruptcy concerns an individual and his or her creditors whilst liquidation can impact more parties. Directors, shareholders, creditors, and employees could be impacted by a company going into liquidation, whether it’s through termination of employment, recovering debt, or not successfully recovering debt.

Bankruptcy usually happens due to insolvency, but companies that enter liquidation could do so because of insolvency or some other reason. A solvent company can choose to liquidate because its members choose to stop operating, or for some other reason. Both liquidation and bankruptcy can be involuntary or voluntary, and both concepts involve managing assets and paying debt where possible, and both are options of last resort.