Difference between Bankruptcy and Insolvency

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.

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.

Insolvency can be temporary and the initial stage defines the incapability to clear
dues, whereas bankruptcy is permanent and the final stage, wherein the assets
of the individual are sold to recover the debt.

Insolvency is not the last resort, but bankruptcy is. Insolvency is a financial state
whereas bankruptcy is an economic state. Insolvency does not reflect the legal
status of an individual or a business organisation. Bankruptcy reflects the legal
status of an individual or a Company. Therefore, it is lawful procedure used for
helping insolvent individuals or business organisations.

Insolvency does not impact the credit rating of an individual or an organisation

whereas Bankruptcy has a possible effect on the credit rating of an individual or
a business organisation.

Insolvency can be reversed by reducing cost, selling assets at reasonable prices,

raising finance, negotiating debt, and getting acquired by a larger corporation. In
contrast, once the bankruptcy is declared, there is no going back.

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 nutshell, 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.