What’s the difference between liquidation and bankruptcy? 

If you’re new to insolvency, we know that it can be a minefield. There’s lots to think about and it can often be a stressful time. In this blog, we’re telling you what’s the difference between liquidation and bankruptcy? 

Many directors that we speak to get confused and ask ‘is insolvency the same as bankruptcy?’ This is generally because people think that to liquidate a company, it must be because there’s no money left. This is not actually always the case. 

What is bankruptcy? 

Bankruptcy is a personal procedure, whereby an individual is unable to pay their debts. This would lead to them filing for bankruptcy. Alternatively, an individual may be forced into bankruptcy by someone they owe money to. 

What is a liquidation? 

A liquidation is very different to bankruptcy. This is because it only affects a company rather than an individual. A liquidation is an insolvency procedure. In the same way as bankruptcy, if a company can no longer afford to pay their debts, they may choose or be forced to enter a liquidation and company closure procedure. 

There are a few forms of liquidation that you may wish to consider: 

Members voluntary liquidation 

A member’s voluntary liquidation (MVL) is used by companies who have enough money in the bank to pay off their debts. When they enter the MVL process, the creditors are paid in full and the business no longer exists. This method is often used by those who longer need to use their company, such as contractors dealing with IR35 and closing a limited company

Creditors voluntary liquidation 

A creditors voluntary liquidation is used by businesses who do not have enough money to pay off their creditor debts. A positive about this liquidation process is that directors enter it voluntarily. 

Compulsory liquidation

A compulsory liquidation begins after a creditor has issued a winding up petition to the business. In these cases, the creditors have tried multiple times to get the money they are owed and have been unsuccessful. 

A compulsory liquidation is not the best process to be involved with as it shows you have not complied with your director responsibilities and have likely tried to continue trading while burying your head in the sand. 

Bankruptcy vs insolvency 

While both procedures are concerned with being unable to pay business debts. The key difference between bankruptcy and insolvency is that bankruptcy is personal and insolvency and liquidation are for company use. 

We received a call from a client earlier who asked ‘if I liquidate, does that make me bankrupt?’ The answer is no and it is the same in 99% of cases. 

A liquidation is the formal ending of a company. This has absolutely no bearing on the director’s credit score, unless you have signed a personal guarantee. 

Signed a personal guarantee? 

A personal guarantee is essentially used as a promise that a director will repay money that is being loaned. When loaning money from creditors such as the bank, you will usually be required to sign a personal guarantee. 

For the bounce back loan, directors were not required to sign personal guarantees. Instead, the government provided security to the lenders. This means that if the money has been used correctly, and your business ends up being liquidated, the bounce back loan would be written off. 

If you’re worried about personal guarantees, you should seek advice as soon as you can. A personal guarantee would affect both bankruptcy and liquidation.

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