Council chiefs had been working on moves to buy The Gathering brand so the company could settle its outstanding 300,000 debts, but they concluded it was only worth 100,000 at most.
Tory peer Lord Sempill said there was no option but to put The Gathering 2009 Ltd into liquidation.
The two-day event in Holyrood Park last summer – a centrepiece of the Year of Homecoming celebrations – was judged a success, but it ended with debts of 600,000, despite receiving 500,000 of public funding.
Half the debt was written off by public sector bodies, but around 50 small firms in Edinburgh are still owed a total of 300,000.
The Fringe made a 132,000 profit last year – a dramatic financial recovery from its 900,000 loss in 2008 – thanks to box office sales that were nine per cent higher than the previous best-ever.