Insolvency: Becoming Insolvent or Bankrupt

What is insolvency?

Insolvency is more popularly known as bankruptcy. It is a situation where the company or individual is unable to pay their debtors at a specified time. While the term bankruptcy is more frequently used to describe individuals, insolvency is more often used to describe the financial mishap of an individual or companies.

What causes insolvency?

There are many possible situations that can cause bankruptcy or insolvency. In the case of companies, insolvency can be brought about by poor sales and marketing strategies, accumulation of unused supplies, acquisition of risky investments and tough economies. In the case of individuals, insolvency might be the result of mismanagement of assets, wrong financial investments, abuse of credit limits, unemployment, death, health expenses and other similar matters.

What does one do when he or she goes insolvent?

A person or company that fears that they are going insolvent should closely estimate the amount of debt in hand. After that, they should assess the assets he or she has, weighing one up against the other. Sometimes, where debts outweigh assets and creditors, it is possible for a person or a company to enlist the assistance of a financial institution while they reorganize their affairs. This may happen, for instance, during a tough economic period: a lender might be convinced to help a person or company through that period based on the assumption that soon, when the economy improves, that person or company will become solvent again. This process is known as administration. Where one’s debts far outstrip one’s assets and monies owed, it may be advisable for a person or company to file for insolvency, declaring themselves bankrupt.

What will happen to the company that filed for insolvency?

Insolvency laws in the United Kingdom mainly provide four measures towards handling insolvency. This could lead to administration, receivership, liquidation or company voluntary agreement.

Administration

In its aim to save companies from insolvency, UK laws make provision for administration. This proactive solution is designed to keep the business running despite the harsh financial condition it is facing. Most companies prefer applying for administration measures to ensure that their assets are intact and protected from prying creditors. Companies that are under UK administration policies are required to submit to debt management plans and restructuring. For these reasons, this measure is limited to those creditors who can show strong signs of recovering.

Receivership

Not all companies that file for insolvency are unable to pay off their debts. They may have assets and other similar ownership items that they can use to pay for the costs of their debts. In this regard, the court decides on receivership. This measure provides the creditor or financial institution the chance to acquire the company’s assets and properties as payments for the debt that it has incurred. In several cases, this means that the creditor acquires all the assets of the company. However, companies with different creditors might have problems with receivership as their assets may not be enough to pay for the debts that it has garnered. In this case, the company or its owners might be required to pay hard money for the remaining debts. The extent of liability will vary from one case to another, depending on how the business is structured.

Liquidation

Liquidation is probably the worst case scenario that could happen to a company. This means that the court has decided to close down the company and stop its operations before it accrues further debts or fails to provide any further services. Once this happens, there is no chance for the company to revive itself. However, liquidation measures are only applied when the court sees that the company is no longer capable of recuperating what it has lost to debts. In this regard the company and its employees would be affected.

Company voluntary arrangement

This kind of measure provides the company more room to grow. When a company voluntary agreement is considered, the company and its insolvency lawyer must set a meeting with the creditors. They then propose arrangements for payments, agreeing dates and amounts to be paid. Getting a company voluntary agreement may take time depending on the conditions stipulated by the creditor. Lawyers of both parties will usually negotiate the terms in this kind of agreement. Once the document has been approved by all parties, the company sees to it that it pays the necessary fees at their schedules. Failure to comply would result to a contract void and could lead to legal battles.

What can individuals do to handle insolvency?

Individuals who have filed for insolvency can use the following alternatives:

Debt Relief Order

A debt relief order could be considered as one of the easiest alternative to get away from insolvency. However, this kind of measure has strict limitations. Debt Relief Order are only given to individuals whose income and assets are very little, small debt of lower than £15,000 and do not have a home of their own. The order typically lasts for 12 months. Once the individual proves that his or her financial situation has not improved, he or she will be provided an exemption from his or her debts.

Informal arrangements

An informal arrangement is an unwritten arrangement with the creditor that stipulates the terms by which an individual has to pay back debts. This may be an oral agreement. They are not legally binding and the risk inherent to such an arrangement is large because the creditor can deny that they ever approved an informal arrangement and force the individual to pay his or her debts at any time the creditor pleases by arguing their case in court.