Is Business Bankruptcy the Same As Dissolution?

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When a business comes to a close, winding down and termination can occur through dissolution or in the case of financial woes, as the result of bankruptcy. Although both legal processes can result in the termination of a business, dissolution and bankruptcy are not one and the same. A company that dissolves may not go through bankruptcy, and not all bankruptcies result in dissolution.

Dissolution

  • The two types of dissolution are involuntary dissolution and voluntary dissolution. Involuntary dissolution can be caused by the Secretary of the State for in quo warranto, which means the corporation failed to maintain itself properly or by a court order for fraud, insolvency or oppression of a minority of shareholders. Voluntary dissolution, on the other hand, can occur by a majority vote of the board of directors and shareholders to dissolve the corporation, or by a court-order if the shareholders petition the court for dissolution on the basis of abuse, waste or harmful deadlock caused by the board of directors.

Chapter 11 Bankruptcy

  • Bankruptcy is the legal process where a debtor, such a corporation, can be absolved of its debts under federal law. Individuals file under Chapter 7 or Chapter 13, while corporations file for bankruptcy under Chapter 11. This allows companies on the brink of insolvency or financial failure to restructure their finances and reorganize their debt obligations so that they can continue to operate. Companies commonly use Chapter 11 bankruptcy as the last alternative when their finances are so meager they can no longer pay their creditors but wish to remain in business.

Bankruptcy and Dissolution

  • A bankrupt business may ultimately dissolve. If the company is so bankrupt that it is insolvent, involuntary dissolution may be ordered by the court. Similarly, sometimes bankruptcy is used as an attempt to save a company, and when the company still fails, voluntary dissolution may be the only recourse.

Key Differences

  • A dissolved company is no longer in operation but a bankrupt company can continue to operate, particularly if it has filed for bankruptcy and has gleaned Chapter 11 bankruptcy protection.

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