HELPUL INFORMATION

What is the difference between liquidation and bankruptcy?

What is the difference between liquidation and bankruptcy?

Author

  • Antony Resnick

    Before migrating to Australia in January 2003, Antony ran the Grant Thornton South African Insolvency Practice as Managing Director for 10 years.

Liquidation and bankruptcy are related but distinct concepts.

When a company or individual is confronted with financial troubles, there can sometimes be confusion about whether they need a liquidation or bankruptcy. 

Here’s a brief explanation of the different meanings and implications between the two:

Liquidation

Liquidation is a legal process in which a company’s legal structure is wound up, and its assets are sold off, with the proceeds used to pay off its creditors.

Liquidation can be initiated voluntarily by the company’s directors’ shareholders, known as “Voluntary Liquidation”, or by an external party, such as a creditor by application to court, known as “Involuntary Liquidation”.  If the court determines that the company is insolvent and cannot pay its debts, it can order the liquidation of the company.

During the liquidation process, a liquidator is appointed to oversee the sale of the assets and distribute the proceeds to the creditors in a specific order of priority.  Once these debts are repaid, any remaining funds are distributed amongst the shareholders. 

The goal of liquidation is to wind up the affairs of a company that is no longer viable or competitive and to distribute its assets as fairly and efficiently as possible to its creditors.

The end result of liquidation is the dissolution of the company.

Bankruptcy

Bankruptcy, on the other hand, is a legal process that applies to individuals who are unable to pay their debts.

Bankruptcy provides a framework for dealing with outstanding debt.  It provides protection and breathing space for debtors from any legal actions by creditors.  This gives them the opportunity to negotiate new terms and devise a plan to resolve the debt, allowing them to possibly discharge some or all their debts and start anew.

Bankruptcy can apply to both individuals, known as “Personal Bankruptcy” and businesses, known as “Corporate Bankruptcy”.

The bankruptcy process is supervised by a trustee, responsible for selling off the bankrupt’s assets and distributing the proceeds to the creditors.

The goal of bankruptcy is to provide individuals with a fresh start and to ensure that creditors are treated fairly.

Summary

In general, liquidation is a process that applies to companies, while bankruptcy is a process that applies to individuals. Both processes involve the sale of assets and the distribution of proceeds to creditors, but the goals and procedures are different depending on the jurisdiction and the specific circumstances surrounding each case. 

So, it’s best for a company or individual finding themselves confused or in trouble, to seek professional advice from financial or legal experts who specialise in this area.  They can provide the guidance to help make informed decision in line with the best interests of the company or individual. 

If you are wanting to speak to a specialist about either liquidation or bankruptcy, please contact Antony Resnick at dVT Group at (02) 9633 3333 or email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

VIEW OTHER USEFUL INFORMATION