What's the difference between bankruptcy and liquidation? This is one of the most common questions that we field from directors and individuals we don’t fully understand how the different types of insolvency may apply to their current situation and how it will affect them.
Given the current climate we are in with company insolvencies on the rise it pays to understand the difference.
While there are a number of detailed differences in simple terms bankruptcy is personal, and liquidation is for commercial entities (companies, trusts, incorporated societies etc.) The confusion often arises because of the use of the bankruptcy term in relation to companies in the USA which we often see in the media and on TV shows -XYZ company has entered Chapter 11 (or another number) Bankruptcy under the Bankruptcy Code.
Bankruptcy:
For an individual bankruptcy is not the end of the road, it just draws a line in the sand for their financial position at a certain date, their adjudication date. From this date their affairs are handed over to the Official Assignee (a government entity) to sell assets and pay creditors. A bankrupt is able to retain limited personal assets such as a vehicle up to a certain amount and some tools of trade.
During the term of their bankruptcy it are also a number of rules and restrictions in place that the bankrupt individual will have to abide by or apply for permission from the Official Assignee if they wish to work outside these rules (travel restrictions, self employment etc.). The bankruptcy term is around 3 years, provided the bankrupt completes their statement off affairs and does not breach restrictions that are placed upon them. The individual is then discharged at the end of the term to hopefully have a fresh start and continue contributing to the economy.
https://www.insolvency.govt.nz/personal-debt/personal-insolvency-options/bankruptcy
The above link is from the Insolvency and Trustee Service who administer all bankruptcies in NZ and details the basics on bankruptcy, for additional reading and more detailed informaiton.
Liquidation:
While a liquidation on the other hand will bring an end to a company. A liquidator will be appointed to deal with the affairs of the company and wind it up. Liquidators are generally Licensed Insolvency Practitioners who work for commercial entities, though the Official Assignee does take appointments if no one else is appointed by the court or the shareholders are bankrupt.
The liquidator is able to trade the business as a going concern to realise the assets, if a sale occurs it is to a new entity, otherwise the liquidator will close down the business and realise its assets, through auction or otherwise, and distribute the proceeds to creditors. The liquidators will also investigate the affairs of the company and review its books and records. Once the assets are realised and the investigation complete the company is then struck off the Companies Register.
For directors the rules and regulations placed on bankrupts do not apply during a liquidation, this is where people often get confused. While directors have duties to assist the liquidator they are still able to go out and start new companies, incur debt, travel and their personal assets are not on the line to satisfy creditor claims (unless there are personal guarantees, breaches of directors' duties or a debt to the company etc.)
https://www.mvp.co.nz/mcdonald-vague/liquidations
The above link is from our website and goes into further detail on liquidations, you are also able to request the guide to liquidation from it for further reading.
Essentially in NZ bankruptcy is for individuals and liquidation for commercial entities.
Be sure to contact our excellent team if you have further questions, we are here to help 0800 30 30 34.