Difference between Liquidation and Bankruptcy Overview
The difference between Liquidation and Bankruptcy is more than just a label with Liquidation applying to companies and Bankruptcy for individuals.
Liquidation and Bankruptcy are two similar yet distinct processes used for resolving financial difficulties for individuals and businesses that are insolvent.
Nature Of The Process
Liquidation is a process of selling off a company’s assets to pay off its debts which is operated by a Liquidator.
Bankruptcy, on the other hand, is a legal process that involves a court declaring an individual unable to repay their debts except where the individual requests the process be started by applying for their own Bankruptcy. Unlike Liquidation, the Insolvency Practitioner responsible is known as the Trustee in Bankruptcy in whom the assets of the Bankrupt vest pursuant to Section 306 of the Insolvency Act 1986.
Who Can Initiate The Process
Liquidation can be initiated by the company itself or by its creditors.
Bankruptcy is initiated by the debtor themselves or their creditors through a Bankruptcy Petition.
Outcome
The outcome of Liquidation is the dissolution of the company and the distribution of its remaining assets to creditors.
Bankruptcy likewise tends to result in the realisation of some assets, but the individual can in effect restart their financial life once they have their discharge from Bankruptcy.
Impact On The Individual
Liquidation of a company generally has no impact on the personal finances of its owners. There are many exceptions that can arise such as if a Director of an owner managed company has provided personal guarantees to enable the company to secure finance for example to purchase assets. Alternatively whilst limited liability company will ordinarily enable a Director to trade without being personally liable for company debts it is possible if they have not complied with their Director duties that they can be ordered to compensate a company for losses they have caused. This can give rise to liability for a Director in cases of Wrongful Trading and or Misfeasance for example.
Furthermore, if the Insolvency Service investigates a Director and initiates Director Disqualification Proceedings due to Director misconduct this can lead to a Court Order for compensation in respect of losses caused to creditors. These are known as Director Disqualification Compensation Orders.
As a result, it is possible for a Director to lose their home if their company goes into Liquidation. This is a reasonably rare event but it can and does happen.
Bankruptcy, however, can have serious implications for an individual’s credit score and financial future in a different way. In particular, the loss of the home if you go bankrupt is quite common unfortunately because after one year of Bankruptcy, the interests of creditors become paramount unless there are exceptional circumstances.
Timescales For The Process
Liquidation, particularly Voluntary Liquidation can sometimes be a faster process than Bankruptcy and be completed within a few months but it can take many years in more complicated cases. Bankruptcy can take several years to resolve even if a person is discharged from the Bankruptcy restrictions.
In summary, Liquidation and Bankruptcy are two different insolvency procedures used to address financial difficulties, but they differ in their nature, initiation, outcome, impact, and time frame. It’s important to consider the specific circumstances of a situation and seek legal advice on your options for resolving your financial difficulties.
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Disclaimer: Difference Between Liquidation And Bankruptcy
This page is not legal advice and should not be relied upon as such. This article Difference Between Liquidation And Bankruptcy is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.
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