Difference Between Liquidation and Bankruptcy

Liquidation vs Bankruptcy

Bankruptcy and liquidation have become common terms today. When a person has become insolvent that is when he cannot repay debts he has taken from sundry creditors and he is under duress because of threats from creditors, there is one option under the law that he can exercise to wriggle out from such a depressing scenario. It is called bankruptcy and is a legal procedure that protects one from the clutches of creditors and helps him to meet the financial exigencies in a controlled manner. Liquidation is another term that is used for a similar procedure. People remain confused between the two terms and cannot make out the differences. This article will highlight these differences and help readers analyze the circumstances in which these terms are applied.

First and foremost, while the term bankruptcy is limited to individuals, liquidation takes place only in the case of companies. Liquidation also differs in the sense that assets of an insolvent company are sold to pay the debts taken from creditors. In liquidation, a company finally comes to its end whereas an individual, even after bankruptcy can make a restart. In some cases bankruptcy and liquidation may be voluntary while in others creditors may demand these procedures to recover their dues.

Both bankruptcy as well as liquidation has a demoralizing effect. An individual may be required to forego his possessions such as car and home whereas all assets of a company are sold to recover the dues of creditors.

In the case of a company, liquidation proceedings begin when its creditors pass a resolution to this effect. The affairs of the company then pass on into the hands of an administrator. Another person known as liquidator is appointed who takes the responsibility of safeguarding the interest of the creditors. He sells the assets of the company, and also investigates into the reasons of failure of the company. The liquidator decides on the order according to which creditors start to receive their money. Secured creditors are the first to receive their money while next in line are unsecured creditors. Shareholders are the last to receive their money. If even after selling all the assets, money is not sufficient to pay back all the creditors, money is divided into the proportion of their stakes and returned to them.

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