What is the Difference between Company Bankruptcy and Business Liquidation?
For many people, bankruptcy and liquidation mean the same thing – you can’t pay your debts. It is not that simple and bankruptcy is completely different to liquidation. Whether you proceed with bankruptcy or liquidation will depend on your business structure, what you’re trying to achieve, and other considerations.
We’ve taken a look at business bankruptcy and business liquidation, and outlined their key differences here.
What is company bankruptcy?
Technically company bankruptcy (also known as business bankruptcy) isn’t possible if you are operating as a company. However, if your business operates under a sole trader or partnership structure, you can opt for bankruptcy as an individual. The business itself, however, isn’t considered bankrupt even if you are.
Bankruptcy is seen as an option of last resort, and it’s typically used for dealing with debt that can’t be repaid. Becoming bankrupt means you’re declared by law to be unable to repay your debts. Most of your debts could be eliminated in this way, and debt collectors and creditors will stop contacting you.
You can become bankrupt in two ways: by voluntarily filing for bankruptcy yourself or through your creditors applying for you to become bankrupt. Once you’re bankrupt, a registered bankruptcy trustee takes control of most of your finances and tries to pay off your debts. They have the power to sell your assets and to take any income earned over a certain limit.
Bankruptcy lasts for three years. During this time you will have limits on what you can do, such as restrictions on running companies and work in certain professions. Bankruptcy is recorded on your credit report for up to seven years and on the National Personal Insolvency Index permanently. And since it can have serious implications for your financial future, you should consider bankruptcy only if you have no other better option.
If you have recently declared bankrupt, our article how to bounce back from bankruptcy can set you on the right path to recovery.
What is business liquidation?
In contrast, business liquidation applies only to companies. If your company is unable to pay its debts and goes into liquidation, a liquidator is appointed and the business ceases operations. Typically company assets are sold or realised to repay debts. Once that’s done, the company is shut down.
There are different types of liquidation including:
- Creditors' Voluntary Liquidation (CVL)
- Members' Voluntary Liquidation
- Provisional Liquidation
- Simplified Liquidation
- Court Ordered Liquidation
Liquidation can be ordered by a court or initiated by creditors or members. Liquidation could be initiated if the company wants to end its operations. The outcomes are typically the same for both types of liquidation, but they differ in the way they’re initiated.
Alternatives or preceding stages to liquidation could be receivership or voluntary administration. These insolvency processes could help companies in trouble without the winding up and closing down that liquidation involves.
Bankruptcy and liquidation: key differences to know
There are a number of key differences between bankruptcy and liquidation. The most notable is that bankruptcy is only for individuals and liquidation is only for companies.
Other important differences include the following.
- State vs process – Bankruptcy is a state during which the individual is considered to be unable to repay his or her debts. Liquidation is a process that distributes a company’s assets and shuts down the company permanently.
- Permanent outcome – While both bankruptcy and liquidation are temporary processes, liquidation results in a permanent closing down of the business. The company is permanently closed down while bankruptcy lasts only three years.
- Fresh start – While bankruptcy can give an individual a new start with a financial reboot, liquidation results in the company shutting down so it can’t give businesses the same opportunity to reboot.
Bankruptcy and liquidation are similar in that both can be either voluntary or involuntary, and the purpose could be to resolve (personal or business) insolvency in some way. The two processes also similar in the sense they’re drastic measures for dealing with insolvency.
When to choose bankruptcy, and when to choose liquidation
Whether you choose bankruptcy or liquidation will depend on whether you’re an individual or a company. However, both are options of last resort and sometimes they can be involuntary as explained above. If the prospects of insolvency are addressed early enough, the prospects of a successful restructure and turnaround are significantly higher.
Since bankruptcy is a radical measure, make sure you explore other options before opting for it. Alternatives could help resolve your debt issues without you having to resort to bankruptcy. For example, financial dispute resolution, informal arrangements with creditors, debt agreements, personal insolvency agreements, and bankruptcy assistance could all help you manage your debt and creditor relationships. Australian Debt Solver provide professional business advisory services that will explore all the options available to you.
Companies could voluntarily choose to go into liquidation if they want to shut down operations and ensure assets are distributed equally between creditors. It’s a cost-effective way to make sure the company is closed down, assets are realised, and creditors are paid in an orderly fashion.
Australian Debt Solvers specialise in both business liquidation and in measures to help prevent your business from closing down, such as voluntary administration. To speak with our expert team on what your business options are, contact us today and we’ll assist you with finding the right resolution for your situation.
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