What is the difference between bankruptcy and liquidation?

Bankruptcy and liquidation both refer to a legal process that occurs when debts cannot be repaid. Bankruptcy is the legal process through which private individuals can be released from their debt. Liquidation forms part of the insolvency process by which companies can achieve the same relief.

Both individuals and companies are advised to obtain legal advice from a specialist insolvency lawyer before they petition for bankruptcy as there may be more suitable alternatives for dealing with their debt.

For background information on this area of law, visit our debt and insolvency pages.

Bankruptcy

An individual can petition the court for bankruptcy, or one of their creditors can petition for their bankruptcy. In order for a creditor to apply for a debtor’s bankruptcy, the debtor must owe them at least £750.

The petition must be filed at a county court or the High Court in London. The court will then consider the application and grant the bankruptcy order if appropriate.

After the court has granted the order, an Official Receiver will be appointed to administer the bankruptcy. They are responsible for protecting the individual’s assets and for conducting an investigation into their financial affairs.

An Official Receiver can act as the trustee in bankruptcy or the role could be performed by an Insolvency Practitioner. The trustee in bankruptcy is responsible for selling the individual’s assets, including their home, and repaying the creditors.

Liquidation

A company that cannot pay its debts has additional options. It can enter into administration or receivership in order to try and keep it running. If these processes fail however, the company will be liquidated.

It is also possible for a company to enter liquidation voluntarily if it is decided to cease trading.

Liquidation refers to the process by which the companies’ assets are audited and sold off, usually to pay its debts. Depending on the size of the company, this can take anything from weeks to years. For example, the process of winding up the defunct Lehman Brothers bank has been going since its insolvency in 2008 and is not expected to finish until 2018.

Both individuals and companies are advised to obtain legal advice from a specialist insolvency solicitor before entering into bankruptcy or liquidation. In addition, legal advice should be obtained immediately if faced with involuntary proceedings.

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