| Contents |
|---|
Although bankruptcy can arise through unwise extravagant spending, it is more common for an individual to become bankrupt because their business or the business that they have guaranteed fails.
Bankruptcy is a process that arises when a debtor is found to be unable to pay their debts from their own resources. A debtor may be unable to pay their debts if:
If a debtor is unable to pay their debts in either of these ways, they are declared to be 'insolvent' and susceptible to bankruptcy proceedings.
On the making of a bankruptcy order against them, the debtor becomes a bankrupt and their properties will vest in their trustee in bankruptcy and be distributed among their creditors.
An insolvent company may be put into liquidation whereby all its assets are taken and shared between its creditors. Liquidation differs from bankruptcy in that at the end of the liquidation, the company ceases to exist.
There are also arrangements other than liquidation that enable a company to survive insolvency. The terms 'liquidation' and 'winding-up' are synonymous, both describing the process by which the existence of a company is brought to an end and its property administered for the benefit of its creditors and members.
There are three types of liquidation; compulsory, members' voluntary and creditors' voluntary liquidations.
The distinction between 'compulsory' and 'voluntary' liquidations lies in the fact that a compulsory liquidation is imposed on the company by a court order, whereas a voluntary liquidation is commenced by the company's own resolution.
