There is a huge difference between ‘bankruptcy’ and ‘liquidation’. To file bankruptcy means that the debtor is having difficulties paying off debt but is given a chance to pay them off, while still continuing to run a business, as in a Chapter 7 Bankruptcy.
However, when a company is liquidated, all operations come to a standstill. The assets are listed, including the office equipment, vehicles and furnishings and machinery, in the case of factories. The Debtors listing is drawn up with outstanding monies owed to the company and is collected in by the Department of Justice appointee.
Then the Creditors are contacted and they are invited to put in claims for their outstanding debts with the company. Either they will be paid out in order of priority, or they can seize goods to cover the amount. The secured loans will be paid out first. These will be any company that holds collateral on the loans. They can seize the collateral and sell it as recovery – usually, at below market value.
Then the unsecured loans are paid. These would include outstanding taxes, wages owed to employees and loans without collateral.
After all this, if there is still anything left, the shareholders will divvy out what is left. Generally, there won’t be. The Company is then declared ‘Liquidated’ and any debts still owing are written off.
When an individual or sole proprietor files a Chapter 13 Bankruptcy and the court is given a list of assets and liabilities, they perform a ‘liquidation’ test. This is an examination to see if your plan-of-action to pay off your creditors is being fair to the creditors, and if you actually can keep up with your proposed payment plan, over the following three to five years.
They compare it to a Chapter 7 Bankruptcy case, whereby your assets can be sold off to pay the creditors. If you don’t have sufficient assets, they will decline the Chapter 13 application and your company or the individual, will be put under liquidation.
In the case of an individual, even though the bank accounts will be frozen, and the home sold, there are instances when personal items can be retained like clothing, jewelry, a vehicle up to a certain value and pension funds.
Going into liquidation voluntarily is always preferable to having your company declared insolvent by the courts via your creditors. At least in this way, the director has full control of the dissolution of the business, with the help of an Insolvency Practitioner. Together, they can direct the way the assets are sold to recover capital and the business can be wound up in a less stressful manner.
Having compulsory liquidation could mean the director can be held personally liable, putting his personal assets on the line and he or other officers of the business could be charged with malfeasance, causing all sorts of distress and costs for a long time to come. Having that kind of charge on one’s record, means that getting future loans, opening another business or getting a mortgage, will be completely out of the question.
Being liquidated subsequent to declaring bankruptcy will save costs and reputations in the long run and will be less stressful all around.