Overview of bankruptcy and liquidation of companies


Many businesses go through financial crises due to several reasons, including failing to take the necessary precautions in advance, failing to develop an appropriate action plan to address such crises and paying insufficient attention to marketing and promotion among other reasons. A number of business owners, when faced with such crisis, may first consider bankruptcy and exiting the market.

Experts, however, may disagree; instead advising business owners to take the time to seek expert advice and explore all potential options. Bankruptcy or liquidation of a business should be a last resort.

Ask for advice and support

When your business starts accumulating debt, it would seem your only option is liquidation or filing for bankruptcy. But before you take any action, experts advise you to seek support from specialists. They may guide you through different ways to repay your debts, instead of filing for bankruptcy or closing your business.

Understanding the concepts of bankruptcy and liquidation

Bankruptcy and liquidation represent an option when dealing with debt that cannot be repaid. Bankruptcy applies only to individuals (not companies). When you become bankrupt, you will be declared unable to pay your debt according to laws and legislations in your country. Bankruptcy writes off most of your debts. It should be noted that bankruptcy proceedings require a period of three years to complete and may affect your financial future, so filing for bankruptcy should be your last resort.

Liquidation, on the other hand, only applies to companies. When the firm fails to pay off its debt, it is forced to cease its operations and liquidate its business assets in an attempt to repay its debts.

How does bankruptcy and liquidation apply to your business?

If you individually manage an establishment or in partnership with someone, you or your partner may become bankrupt as individuals (meaning that the business itself does not enter bankruptcy).

If you manage your business within the framework of a company, and accumulate unmanageable debts, then this company will not be able to pursue its operations. You will be faced with these three most common options: liquidation, voluntary management or judicial custody.

How to deal with debt (for individual establishment or partnerships)

If your business has accumulated significant debt, you should immediately seek help from financial professionals such as accountants. They can assess your situation properly and give you advice on how to manage your debt. They may instruct you to ask creditors (individuals or companies) to allow you more time to repay your debts, or even accept lower payments to settle debts.

Your financial advisor can present you with four options to deal with debt, including:

  • Declaration of intent
  • Signing a debt agreement
  • Signing a personal insolvency agreement
  • Filing for Bankruptcy


With regard to debt collection and personal insolvency agreements, they fall within the framework of the bankruptcy proceedings.

  • If creditors do not accept these agreements, they can resort to court to force bankruptcy. This bankruptcy will be announced in a public legal document.

Declaration of intent

During this step, you can freeze most of your debt for 21 days by submitting an application for a declaration of intent, which gives you some time to consider how to manage your debts.

Debt agreement

Through this agreement, you can apply for debt settlement by:

  • Paying a lump sum, less than the amount you owe.
  • Paying off your debts in installments.
  • Freezing debts for a certain period, so you will refrain from repaying your debts until your business picks up again

In order to prepare this agreement, the consent of the vast majority of creditors should be obtained. You should also meet certain conditions to qualify for this step, including maintaining income, assets and debt under a certain limit.

Personal insolvency agreement

This agreement allows you to repay your debts depending on your financial situation. It is somewhat like a debt agreement, but your debts, assets, and income will not be placed under a certain limit.

You should also be aware that by signing this agreement, you may end up paying more money than if you declare bankruptcy, so be sure to understand all the consequences of each decision before you take it.

Declaring bankruptcy

There are two options to initiate bankruptcy:

  • Voluntarily initiating bankruptcy
  • Creditors (individuals or companies) can apply to court to initiate bankruptcy proceedings

Entering bankruptcy means that a licensed trustee will take control of most of your financial resources to try to pay off your own debts. This can happen by selling your business assets (although you can keep some assets such as personal belongings) and to collect any income you earn beyond certain limits.

It is important to note that bankruptcy proceedings usually require three years, during which you will be subject to restrictions. For example, you may be restricted from managing any company or from practicing certain trades or professions.

How to deal with debt (for companies)

Unlike individual establishments or partnerships, companies are independent legal entities, to which different arrangements apply to manage insolvency (where the company’s accumulated debt cannot be controlled).

Under this scenario, you should seek immediate assistance from financial professionals such as accountants to help you assess your situation properly, give you advice on how to manage your debt, and suggest several options, including:

Voluntary management

If you decide to pursue this option, then a manager will be assigned to take over all of the company’s functions and operations. This manager should not be part of your company. He will seek to:

  • Save the company or maintain its business activity.
  • Restructuring the company, allowing it to repay its debts, without directly entering the liquidation stage.



If the company could not be saved through voluntary management, it will enter liquidation. This phase involves the sale of all commercial assets, repayment of creditors, distribution of any remaining assets to partners or shareholders and finally the dissolution of all business.

During this stage, someone who is not part of your company is assigned to supervise this process.


Judicial custody

Your company can enter the custody stage, if a secured creditor wants to appoint a person to collect and sell the assets of your company in order to repay debts. A secured creditor is a one whose debt is secured by a mortgage or part of the debtor’s property.

Different terms may apply to the agreement with a secured creditor (for example, in certain agreements, the secured creditor is permitted to sell specific assets from the company for debt repayment).

It should be noted that the company can be subject to voluntary management and judicial custody at the same time.



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