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.
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.
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.
For more information on:
- Company voluntary arrangement
- What can individuals do to handle insolvency?
- Debt Relief Order
- Informal arrangements