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Difference between 3 related words: Insolvency vs Bankruptcy vs Liquidation.

In this article, I explained the meaning of 3 similar words from the point of view of Company Law.

1. Insolvency
It is a state where our liabilities are greater than our assets. One is unable to pay its debt. The word insolvent is used for both corporates and non- corporates. 

In insolvency, the shareholders and directors or creditors can request the following out of court:
  • Liquidation of the business.
  • Administration, which involves restructuring of the business in an attempt to save it.
  • Receivership, wherein a creditor or creditors, such as a bank or other investor, appoints an insolvency practitioner to manage the assets in order to pay off the debt as much as possible.
  • Company voluntary arrangement, where a contract is drawn up regarding the payment of debt after an agreement is made between the company and the creditors.

2. Bankruptcy
While the word bankruptcy can be used for individuals only. That is Bankruptcy is a situation where a person becomes insolvent. Here, the one made an application to the authorised authority, to be declared as insolvent. 

3. Liquidation 
It is simply refer as the winding up of an organisation. This term is used in reference to corporate entity only and not with the individuals. A company is liquidated when it is ascertained that the business is not in any state to continue. 


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