insolvency


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Insolvency

Describing a situation in which an individual or firm is unable to service its debts. This occurs when the individual or firm has a little or no cash flow, and may occur due to poor cash management. An insolvent individual or firm often declares bankruptcy, or it may arrive at an understanding with creditors in which it restructures payments.

insolvency

or

bankruptcy

a condition under which an individual or firm's LIABILITIES to CREDITORS exceed ASSETS. The individual or firm is therefore unable to discharge all accumulated liabilities from realizable assets. Insolvency occurs after a period in which an individual's expenditure has exceeded his income, or a firm's costs have exceeded its sales revenues (when LOSSES are made). In the UK the treatment of insolvent companies is governed by the terms of the Insolvency Act 1986. A number of possible steps are involved.

The first stage is often a voluntary arrangement under which the company and its creditors agree to a scheme of reduced or delayed debt payments. If it proves impossible to TURNROUND the company within a reasonable time the firm may ask the bankruptcy court to arrange for the company to be put into administration where an Administrator is appointed to try to reorganize the company and run it, and who will liquidate the company only if he is unable to rehabilitate it.

If the Administrator is successful in rehabilitating the company then it may be returned to its management. Otherwise the next stage is receivership where the Administrator may continue to run the company while selling assets to pay off secured creditors such as DEBENTURE holders whose loans are secured by a fixed charge on a particular asset.

Should the firm's fortunes continue to deteriorate the Administrator may have no alternative but to wind up the firm, i.e. LIQUIDATE its available assets, the proceeds being distributed amongst creditors. In this event the Administrator adopts the role of liquidator, whose function is to sell off the company's asset s and pay back creditors.

When a joint-stock company's assets are liquidated then the proceeds of liquidation will be paid fully to firstly, ‘preferential creditors’ (the INLAND REVENUE for tax due, employees for wages owed etc.); secondly other creditors (banks for loans and TRADE CREDITORS); thirdly, PREFERENCE SHAREHOLDERS; and finally, ORDINARY SHAREHOLDERS, if any funds still remain.

In the UK, under the terms of the Company Directors Disqualification Act 1986, if directors of a joint-stock company continue trading after they should have known that it was insolvent, then they can be charged with wrongful trading, lose the protection of limited liability and become personally responsible for the firm's debts. They may also be declared unfit to be directors and disqualified from acting as directors or managers of any company for up to 15 years.

insolvency

or

bankruptcy

a condition under which an individual or firm's LIABILITIES to CREDITORS exceed ASSETS.

The individual or firm is therefore unable to discharge all accumulated liabilities from realizable assets.

Insolvency occurs after a period in which an individual's expenditure has exceeded his income or a firm's costs have exceeded its sales revenues (LOSSES are made). Frequently an insolvent individual or firm will become bankrupt and arrange for the LIQUIDATION of available assets, the proceeds being distributed amongst creditors. See INSOLVENCY ACT, 1986.

Insolvency

A financial condition in which a taxpayer's total liabilities (debts owed) exceed the total fair market value of all his or her assets (cash and other property). A taxpayer is insolvent to the extent his or her liabilities exceed his or her assets.
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