What is difference between Insolvency and Bankruptcy?

♠ The term insolvency is used for both individuals and organizations. For individuals, it is known as bankruptcy and for corporate it is called corporate insolvency. Both refer to a situation when an individual or company are not able to pay the debt in present or near future and the value of assets held by them are less than liability.

♠ Insolvency in this Code is regarded as a “state” where assets are insufficient to meet the liabilities. If untreated, insolvency will lead to bankruptcy for non-corporate and liquidation of corporate.

♠ While insolvency is a situation which arises due to inability to pay off the debts due to insufficient assets, bankruptcy is a situation wherein application is made to an authority declaring insolvency and seeking to be declared as bankrupt, which will continue until discharge.

♠ From the above, it is evident that insolvency is a state and bankruptcy is a conclusion. A bankrupt would be a conclusive insolvent whereas all insolvencies will not lead to bankruptcies. Typically insolvency situations have two options – resolution and recovery or liquidation.

RELATIONSHIP BETWEEN BANKRUPTCY, INSOLVENCY & LIQUIDATION

1. “Bankruptcy” is a legal proceeding involving a person or business that is unable to repay outstanding debts.

2. The bankruptcy process begins with a petition filed by the debtor, or by the creditors.

3. All of the debtor’s assets are measured and evaluated, and then these assets may be used to repay a portion of outstanding debt.

4. In lucid language, if any person or entity is unable to pay off the debts, it owes to its creditors, on time or as and when they became due and payable, then such person or entity is regarded as “insolvent”.

5. “Liquidation” is the winding up of a corporation or incorporated entity. There are many entities that can initiate proceedings that will lead to Liquidation, those being:-

(a) The Regulatory Bodies;

(b) The Directors of a Company;

(c) The Shareholders of a Company; and

(d) An Unpaid Creditor of a Company

6. In nut shell, insolvency is common to both bankruptcy and liquidation. Not being able to pay debts as and when they became due and payable is the leading cause for Liquidation and is the only way that can cause a natural person to become a bankrupt.