Are Winding Up and Bankruptcy the same? Here’s the answer!June 12, 2023
Starting a company is a long-term investment of time and resources. Despite a company’s best efforts, it may end up in losses. That is a risk that every entrepreneur takes when beginning a new venture.
There are ways to soften the fall in case the company goes through sustained losses. The Companies Act, 2013 states some provisions an organisation needs to follow in tough times. A business can either windup or declare bankruptcy. But aren’t these two the same thing?
Two different ideas
A company facing financial troubles has to go through a process when closing up the business. Winding up is a step in that process. A company must organise its books, sell off and distribute assets, pay off creditors, and restructure the financials before shutting the business down for good. After the company has closed its books and paid off as much debt as possible, it can file for bankruptcy.
Bankruptcy is a declaration that the company gives itself when it cannot pay off its debts. It is basically a restart option initiated when a company gets a court order. It relieves the business by absolving them from obligations to debt providers and helps them reignite their business. After dissolution, a company formally ceases to exist.
What about ROI?
Insolvency provides the business with a do-over, but the company may be the only one benefitting from the decision. During the winding-up process, the shareholders may lose their investment, and the creditors may not recover their funds. The only hope they have to minimise the hit on their wallets is the way the company is filing for bankruptcy.
Company law prescribes methods to file for insolvency, Chapter 7 and Chapter 11. When the company goes for Chapter 7, the investors holding bonds and the shareholders can reap the profits after the company sells its share in the market. But this may not always be the case. If the company’s stock sinks, they might not get a 100% return on their investment. If a company files through Chapter 11, a committee is assigned for the investor’s benefit. This committee works with the organisation to develop a plan to reorganise the business and get it out of debt, reshaping it into a profitable entity. If no appropriate strategy can be devised, the company’s assets can get sold off to pay creditors.
The decision to declare bankruptcy is not easy, but it is necessary. It’s also essential to familiarise yourself with the rules about the same, as different countries have a different set of guidelines. Consultancies like Corporate Leaps can help with that and more. Not only can a company get expert advice on how to go about insolvency, but they can also get help with convoluted bookkeeping. Even though it might seem like a stress-riddled process and can be daunting, it might be a better idea to start over and begin anew.