Bankruptcy, judicial dissolution and liquidation: what is the difference?

Three terms that are often used interchangeably, but that mean something quite different in law. A company "in liquidation" is not "bankrupt". A "judicial dissolution" is not a bankruptcy. This article places the three side by side, explains where they come from and how they relate.

In short

• Bankruptcy is an insolvency procedure: it assumes the company can no longer pay its debts. A court declares the bankruptcy and appoints a trustee (curator).
• Dissolution is the legal decision to end a company. This can be voluntary (a decision of the company itself) or judicial (pronounced by a court). Dissolution in itself says nothing about insolvency.
• Liquidation is the process that follows a dissolution: the assets are realised, the debts paid and any surplus distributed. A liquidator runs that process.

In short: bankruptcy is about insolvency and is run by a trustee (curator); dissolution and liquidation are the normal ending of a company and are run by a liquidator.

Bankruptcy

Bankruptcy is governed by Book XX of the Code of Economic Law (CEL), the book on the insolvency of undertakings.

A company is in a state of bankruptcy when two conditions are met together (art. XX.99 CEL):

1. it has persistently ceased to pay (a lasting cessation of payments, not a temporary cash-flow problem), and
2. its credit is shaken (creditors no longer trust that they will be paid).

Both conditions must be present. A single unpaid invoice or a temporary shortfall is not enough.

Bankruptcy is declared by the competent insolvency court, the Enterprise Court sitting in insolvency matters (art. XX.12 CEL designates the competent court on the basis of the debtor's centre of main interests). In the bankruptcy judgment, the court appoints one or more trustees (curators). From that moment, the company loses the management of its assets: the trustee manages and liquidates the estate under the court's supervision and pays creditors out of what exists.

Dissolution: voluntary or judicial

Dissolution is the decision to end a company. The rules are in the Code of Companies and Associations (CCA).

• Voluntary dissolution. The general meeting of the company itself decides to dissolve. This often happens with a healthy company that ceases its activity.
• Judicial dissolution. A court pronounces the dissolution. A well-known ground is the non-filing of the annual accounts: the Enterprise Court can, at the request of any interested party or of the public prosecutor, pronounce the dissolution of a company that has not filed its annual accounts for three consecutive financial years (art. 2:74 CCA). The company can still avert a judicial dissolution by regularising its situation in time, that is, by filing the missing annual accounts, before the court rules on the merits.

Important: a judicial dissolution is not a bankruptcy. It is often used against dormant companies or "empty shells" that are no longer administratively in order, and does not in itself assume insolvency.

Liquidation

After a dissolution, whether voluntary or judicial, a liquidation as a rule follows. A dissolved company does not immediately cease to exist: it continues to exist as a legal person for as long as its liquidation is running.

During the liquidation, under the direction of a liquidator, the assets are sold, the debts paid and any surplus (the liquidation balance) distributed among the shareholders. Only at the closing of the liquidation does the company definitively cease to exist.

In simple cases it can be faster. The company can decide the dissolution and the immediate closing of the liquidation in a single act (art. 2:80 CCA), provided strict legal conditions are met, including that all debts have been paid or that the creditors concerned agree. In that case no separate liquidator is needed. In practice this is sometimes called a "turbo liquidation".

How do they relate?

• A dissolution is the decision to end; the liquidation is the winding-up that follows. Dissolution and liquidation therefore belong together.
• A bankruptcy is a separate route: it assumes insolvency and is wound up by a trustee, not by a liquidator.
• A company "in liquidation" is therefore not the same as a "bankrupt" company. It is presumed to be solvent, that is, able to pay its debts.
• There is nonetheless a connection: if a company in liquidation turns out to be unable to pay its debts and its credit is shaken, it can still be declared bankrupt.

Where do you see this in Checked?

On a company file, this translates into the status of the company (for example "Active", "In liquidation", "Dissolved" or "Bankrupt") and into the events extracted from the Belgian Official Gazette, such as the publication of a dissolution, the closing of a liquidation or a declaration of bankruptcy. The overview of insolvency procedures and the trustees involved can be found on the dedicated overview pages. Checked presents these facts neutrally and as they appear in the public sources.

Good to know

This is general information, not legal advice. The concrete consequences of a bankruptcy, a dissolution or a liquidation depend on the facts of the file and on the legislation applicable at that time. For a specific situation, consult a lawyer, a notary or an accounting professional.

Bronnen

• Wetboek van economisch recht, Boek XX (Insolventie van ondernemingen), officiële geconsolideerde tekst: ejustice / Belgisch Staatsblad
• Wetboek van vennootschappen en verenigingen (WVV), officiële geconsolideerde tekst: ejustice / Belgisch Staatsblad
• FOD Justitie, Gerechtelijke reorganisatie en faillissement: justitie.belgium.be