What do you mean by Bankruptcy?
Bankruptcy? Liquidation? What is the procedure for filing bankruptcy? Insolvency vs Bankruptcy? Find out the answers!
What is Bankruptcy?
Few companies under unfortunate circumstances run into financial troubles. When a company does not have enough cash flow to operate or run the business it opts for filing bankruptcy.
Though in theory, it gives the company a chance to start afresh it is not an easy process. Different countries have different laws when it comes to bankruptcy.
In India, once the bankruptcy is filed by the company, the court checks the application. The court has the right to either accept or reject it. After the application is accepted, a person is appointed as the “trustee”.
The trustee then handles the whole procedure and the company has to follow the rules and obey the trustee. Here comes the process of liquidation. Liquidation in simple words is to sell goods at a much lower price compared to its worth.
Liquidation is the process in which the company’s assets are evaluated and are used to pay the creditors involved. The liquidator sells all the assets, turns it into cash and then uses it to pay the creditors.
Not all Bankruptcies need liquidation. Few situations involve the restructuring of the company to turn it into more profitable.
Repayment of assets follow hierarchical order. First of all, the claims of the secured creditors — those with collateral followed by preferential creditors are satisfied. Then the remaining assets if any are shared among shareholders.
There are 3 types of liquidation -voluntary, creditor’s voluntary and the compulsory liquidation. Filing for bankruptcy leads to compulsory liquidation. Voluntary liquidation is a choice taken by the company.
Now, What’s the difference between insolvency and bankruptcy?
Both these terms are often perceived the same. Insolvency is a situation in which the company cannot pay its debts prompting it to file for bankruptcy. Bankruptcy, on the other hand, is a legal declaration of the company’s inability to pay their creditors.
All bankrupts are insolvents whereas not all insolvencies lead to the declaration of bankruptcy.
Conclusion:
Filing for bankruptcy helps the debt -laden company to wind up its operation using the assets. After the liquidation process is done, the company ceases to exist in the eyes of the law.
