June 28, 2022

The Difference Between Bankruptcy and Liquidation

Individuals aren’t the only group who can become insolvent or experience financial difficulties – businesses often face the same struggles. While businesses and individuals differ widely in many ways, Australia offers both groups legal avenues to manage financial stress and satisfy their creditors. Bankruptcy and liquidation represent similar concepts, however, one applies strictly to individuals, and the other applies strictly to businesses. To demonstrate the difference between the two, we are going to explore each process in more depth and discuss the real world applications of bankruptcy and liquidation.

What is Bankruptcy?

In Australia, if you become unable to pay your debts, you can declare bankruptcy. Bankruptcy is only available to individual people and not to a business, company or other group entities. Regardless of your income or debt levels, you can voluntarily apply for bankruptcy if you’re unable to repay your creditors, commonly called Voluntary Bankruptcy. If you owe $10,000 or more to your creditors, they may apply to the Court to have you declared bankrupt, commonly called Involuntary Bankruptcy.

Bankruptcy typically lasts for 3 years and 1 day, during which time your trustee may sell your assets and use the money to repay outstanding debts. At the end of the time period, the bankruptcy will cease and you can continue your life with minimal restrictions. You can read more about bankruptcy in our personal insolvency FAQ.

What is Liquidation?

Liquidation is a process that winds up the operations of a company. The company’s assets are sold (liquidated) and the proceeds are used to repay outstanding debts to creditors such as lenders, employees and shareholders.

There are three types of liquidation open to businesses:

  • Court liquidation. In a court liquidation, a company’s creditors apply to the Court to have the company wound up due to non-payment of debts. Court liquidation can also be the result of ongoing losses or an inability to improve trading performance, such as at the end of an administration period.
  • Creditors’ voluntary liquidation. Where a company’s members (such as its directors and shareholders) determine that a company is insolvent, or is likely to become insolvent, they can enter into creditors’ voluntary liquidation without the need for Court intervention. 
  • Members’ voluntary liquidation. A members’ voluntary liquidation is a process that allows a solvent company to be wound up with the help of an independent liquidator. This is useful for winding up businesses that are no longer needed, simplifying the structure of a group or for businesses where the shareholders don’t want to continue trading. Appointing a liquidator ensures the process is carried out fairly and that the company’s assets and liabilities are distributed and discharged correctly. 

It’s important to understand that liquidation is a final measure that ultimately results in the business being permanently deregistered. Businesses that are insolvent, inadequately managed or are concerned about their future can enter into other turnaround management arrangements. Opting for other solutions wherever possible affords businesses the chance to improve their situation and trade on.

The Differences Between Bankruptcy and Liquidation

While bankruptcy and liquidation may represent similar concepts, they are fundamentally different processes with several differences:

  1. Businesses vs individuals. The key difference between bankruptcy and liquidation is who they are open to. In Australia, bankruptcy specifically applies to individuals only, while liquidation is a process that only businesses may undergo.
  2. Legal state. By definition, bankruptcy is a state that lasts for 3 years and 1 day. During that time a trustee will realise your assets and distribute funds to your creditors. On the other hand, liquidation is the process of realising and distributing a company’s assets, ultimately resulting in a company being deregistered with ASIC. The liquidation process is not subject to time restrictions.
  3. The outcome. Bankruptcy allows you to find relief from most debts and start life afresh once the 3 year bankruptcy period has passed. Conversely, liquidation results in the permanent deregistration of a company and does not offer the same chance at a fresh start.

Keeping bankruptcy and liquidation separate is important for helping people and businesses manage their finances. For instance, a struggling company may be liquidated without affecting the personal finances of its directors or shareholders, depending on the company structure. Similarly, you can declare personal bankruptcy without affecting the finances of a business, although bankrupt individuals are disqualified from being a director of a company.

Experiencing Financial Strain? Contact SV Partners for Confidential Advice

Whether you are having trouble with your own finances or are concerned about the state of your business, seeking professional advice early on is key. SV Partners works with both individuals and companies, helping you manage financial strain and work towards the best possible outcome. With a team of highly experienced trustees and liquidators, SV Partners will help you explore personal and corporate insolvency options, up to and including bankruptcy or insolvency. For a confidential, obligation free consultation, you can contact us online at any time or call us on 1800 246 801.

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