Question: What’s the Difference Between Bankruptcy and Insolvency?
Answer:The terms bankruptcy, liquidation and insolvency are sometimes used interchangeably. This is not surprising. They all involve creditors attempting to recover money owed to them. However, the key difference between bankruptcy and insolvency is who the creditor chases for their money.
Bankruptcy
Bankruptcy proceedings are against people, not companies. For example, a creditor can take bankruptcy action against:
- individuals;
- partnerships;
- associations; and
- joint debtors.
Therefore, the difference between bankruptcy and insolvency is that people go bankrupt, while companies go insolvent.
Insolvency
Insolvency means that a company unable to pay your debts when they fall due. However, creditors may allow late payment without triggering insolvency. For example, a supplier may permit late payment, without the seller being insolvent. A good indication of insolvency is whether loans are due and unpaid on an ongoing basis.
For companies, the most common insolvency proceedings are:
- voluntary administration;
- liquidation; and
- receivership.
This article explains these terms below.
Voluntary Administration
Voluntary administration is commenced by the directors of a company, or sometimes a secured creditor with a charge over the company’s assets. In most cases, a company appoints an administrator to oversee the process.
The administrator takes over from the directors to control the company’s affairs and investigate why the company is insolvent. After the investigation, the creditors meet to decide on the future of the company. This process aims to give a company time to save itself from insolvency, or the risk of being insolvent.
Liquidation or Winding Up
Liquidation is a court order to distribute a company’s assets to creditors to pay its debts. This can be ordered by the court or initiated voluntarily by the company or the members.
Receivership
Receivership can apply to companies, individuals or partnerships. However, it is most common for companies. Typically, a secured creditor may appoint an official receiver. The receiver will collect funds to pay the secured creditor that appointed them. The receiver may also choose to keep the business going if there is enough value in doing that.
