Understanding Insolvency

Article Written By: bdyshop@gmail.com

The momentum of the economy ticks with the clock set by the credit. Credit is inevitable for a company to run and expand by offering it the leverage to expand beyond its limited resources in hand. But, the debts have the tendency to spiral at alarming speeds if they are not dealt in the desired manner. When the companies fail to meet its debt as and when they are due, it can be termed as the beginning of insolvency. When the legal action gets enacted against an insolvent company, it is referred as bankruptcy.

Insolvency occurs when the assets of a firm represented in its balance sheet are inadequate to meet the obligations to creditors. In other words, the fair market value of the assets of the company becomes inadequate to meet its liabilities. When a company has been declared as bankrupt by the law, it is given the option to restructure under Chapter 11 providing it with the opportunity to make a turnaround, or get liquidated.

The law demands that any formal insolvency proceedings can be performed only by an insolvency practitioner. He is in a better position to advice on the formal processes involved with insolvency, including bankruptcy, besides acting on re-scheduling of debts, whenever circumstances demand so.

When a company is offered with the opportunity to reorganize, it means that the company continues to remain in existence, with the financial structure revamped giving way for a new beginning. The creditors agree for part settlement of the money due to them or agree for future settlement. Whatever is the agreement entered into with them, the underlying idea is to offer the debtors with a new beginning, besides ensuring fairness of dealing to the creditors.

People generally have the tendency to use the terms bankruptcy and insolvency interchangeably. But, insolvency need not always result in bankruptcy, but bankruptcy happens when an entity or the individual is declared insolvent. Insolvency holds the opportunity for the company to make a comeback before it is declared bankrupt by the court. A business entity can file by itself for bankruptcy or might be filed by the creditors. Sometimes a special resolution from the shareholders gets submitted with the Registrar of Companies for declaring the entity as bankrupt.

Liquidation, on the other hand, occurs when the company has winded up with the assets distributed according to the terms of liquidation, resulting in the dissolution of the entity. Liquidation is the last stage of insolvency.

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