Difference Between Insolvency, Bankruptcy and Liquidation

INSOLVENCY

♦ Insolvency is the inability of a person or corporation to pay their bills as and when they become due and payable.

♦ The word ‘Insolvency‘ can be used for everyone who is unable to pay their dues whether it is body corporate, company, limited liability partnership, partnership firm, individual, HUF, body of individuals.

♦ Insolvency is the trigger that causes a bankruptcy or liquidation.

INSOLVENCY RESULTS IN TWO WAYS :

(1)Bankruptcy

(2) Liquidation

NOTE: Insolvency may not necessarily lead to bankruptcy or liquidation. Insolvency can be rectified through increasing income or reducing expenses rather than filing for bankruptcy or liquidation.

BANKRUPTCY:

• Bankruptcy is when a person is formally declared incapable of paying their dues and payable bills.
• The word “Bankrupt” can be used only for individuals and partnership firms.
• When insolvent individual or partnership firm is formally declared by court that they are incapable of paying their debts then they are termed as BANKRUPT.

LIQUIDATION:

• Liquidation is the process of winding up a corporation or incorporated entity under the supervision of a person or “liquidator”.

ULTIMATELY, INSOLVENCY IS A STATE OR CONDITION AND BANKRUPTCY IS A   FORMAL DECLARATION.