Thecherrygarg at 19:53, 16 May 2022

2022-05-16T19:53:10Z

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{{short description|State of being unable to pay one's debts}}
{{Insolvency}}{{Accounting}}

[[Internet|In]] [[accounting]], '''insolvency''' is the state of being unable to pay the [[debt]]s, by a [[Natural person|person]] or [[company]] ([[debtor]]), at [[Maturity (finance)|maturity]]; those in a state of insolvency are said to be ''insolvent''. There are two forms: [[Cash flow|cash-flow]] insolvency and [[Balance sheet|balance-sheet]] insolvency.

'''Cash-flow insolvency''' is when a person or company has enough [[asset]]s to pay what is owed, but does not have the appropriate form of payment. For example, a person may own a large house and a valuable car, but not have enough [[Market liquidity|liquid]] assets to pay a debt when it falls due. Cash-flow insolvency can usually be resolved by [[negotiation]]. For example, the bill collector may wait until the car is sold and the debtor agrees to pay a penalty.

'''Balance-sheet insolvency''' is when a person or company does not have enough assets to pay all of their debts. The person or company might enter [[bankruptcy]], but not necessarily. Once a loss is accepted by all parties, negotiation is often able to resolve the situation without bankruptcy. A company that is balance-sheet insolvent may still have enough cash to pay its next bill on time. However, most laws will not let the company pay that bill unless it will directly help all their creditors. For example, an insolvent farmer may be allowed to hire people to help harvest the crop, because ''not'' harvesting and selling the crop would be even ''worse'' for his creditors.

It has been suggested that the speaker or writer should either say '''technical insolvency''' or '''actual insolvency''' in order to always be clear{{snd}} where technical insolvency is a [[synonym]] for balance sheet insolvency, which means that [[Current ratio|its liabilities are greater than its assets]], and actual insolvency is a synonym for the first definition of insolvency ("Insolvency is the inability of a debtor to pay their debt.").<ref>{{cite web|author=Graeme Pietersz|title=Moneyterms Investment Definitions|url=http://moneyterms.co.uk/technical-insolvency/|access-date=2013-12-27|archive-date=2017-07-05|archive-url=https://web.archive.org/web/20170705225430/http://moneyterms.co.uk/technical-insolvency/|url-status=live}}</ref> While technical insolvency is a synonym for balance-sheet insolvency, cash-flow insolvency and actual insolvency are not synonyms. The term "cash-flow insolvent" carries a strong (but perhaps not absolute) connotation that the debtor is balance-sheet solvent, whereas the term "actually insolvent" does not.

==Technical definitions==

Cash-flow insolvency involves a lack of [[accounting liquidity|liquidity]] to pay debts as they fall due.

Balance sheet insolvency involves having negative [[net assets]]—where liabilities exceed assets. Insolvency is not a [[synonym]] for [[bankruptcy]], which is a determination of insolvency made by a [[court of law]] with resulting legal orders intended to resolve the insolvency.

[[Accounting liquidity|Accounting insolvency]] happens when total liabilities exceed total assets (negative [[net worth]]).<ref>Fundamentals of Corporate Finance, Ross-Westerfield-Jordan, 10th e, p.549</ref><ref>{{cite web|author=Graeme Pietersz|title=Moneyterms Investment Definitions|url=http://moneyterms.co.uk/insolvency/|access-date=2013-12-27|archive-date=2017-03-17|archive-url=https://web.archive.org/web/20170317013717/http://moneyterms.co.uk/insolvency/|url-status=live}}</ref><ref>Downes, John, and Jordan Elliot. Goodman. ''Dictionary of Finance and Investment Terms''. Hauppauge, NY: Barron's Educational Series, 2003. Print.</ref><ref>UK Insolvency Act 1986, Section 123</ref>

==Consequences==
The principal focus of modern insolvency [[legislation]] and business [[debt restructuring]] practices no longer rests on the [[liquidation]] and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing [[financial distress]] so as to permit the rehabilitation and continuation of their business. This is known as '''business turnaround''' or '''business recovery'''. Implementing a business turnaround may take many forms, including keep and restructure, sale as a going concern, or wind-down and exit. In some jurisdictions, it is an [[offence (law)|offence]] under the insolvency laws for a [[corporation]] to continue in business while insolvent. In others (like the United States with its [[Chapter 11]] provisions), the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out. Increasingly, legislatures have favored alternatives to winding up companies for good.

It can be, in several jurisdictions, grounds for a civil action or even an offence to continue to pay some [[creditor]]s in preference to other creditors once a state of insolvency is reached.<ref>Enterprise Bankruptcy Law of the People's Republic of China (August 27, 2006), Chapter 2, Section 2, Article 16.</ref>

==Debt restructuring==
Debt restructurings are typically handled by professional insolvency and restructuring practitioners, and are usually less expensive and a preferable alternative to bankruptcy.

[[Debt restructuring]] is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.

==Government debt==
Although the term "bankrupt" may be used referring to a government, sovereign states do not go bankrupt. This is so because bankruptcy is governed by national law; there exists no entity to take over such a government and distribute assets to creditors. Governments ''can'' be insolvent in terms of not having money to pay obligations when they are due. If a government does not meet an obligation, it is in "[[default (finance)|default]]". As governments are [[sovereignty|sovereign]] entities, creditors who hold debt of the government cannot easily seize the assets of the government to re-pay the debt (though "[[Vulture funds]]" often find ways to do so). The recourse for the creditor is to request to be repaid at least some of what is owed. However, in most cases, debt in default is [[refinancing|refinanced]] by further borrowing or [[monetization|monetized]] by issuing more [[currency]] (which typically results in [[inflation]] or [[hyperinflation]]).{{cn}}

==Law==
Insolvency regimes around the world have evolved in very different ways, with laws focusing on different strategies for dealing with the insolvent. The outcome of an insolvent restructuring can be very different depending on the laws of the state in which the insolvency proceeding is run, and in many cases different [[Stakeholder (corporate)|stakeholders]] in a company may hold the advantage in different [[jurisdictions]].<ref name="Practitioner">Joseph Swanson and Peter Marshall, [[Houlihan Lokey]] and Lyndon Norley, Kirkland & Ellis International LLP (2008). A Practitioner's Guide to Corporate Restructuring. City & Financial Publishing, 1st edition {{ISBN|978-1-905121-31-1}}</ref>

=== Anguilla ===
{{Main|Anguillan bankruptcy law}}
In [[Anguilla]], the insolvency of individuals is regulated under the Bankruptcy Act (Cap B.15) and corporate insolvency is governed by the Bankruptcy Act (Cap B.15) or the Companies Act (Cap C.65).

===Australia===
{{Main|Australian insolvency law}}
In [[Australia]], corporate insolvency is governed by the [[Corporations Act 2001]] (Cth). Companies can be put into [[Voluntary administration|Voluntary Administration]], Creditors Voluntary Liquidation, and Court Liquidation. Secured creditors with registered charges are able to appoint Receivers and Receivers & Managers depending on their charge.

=== British Virgin Islands ===
{{Main|British Virgin Islands bankruptcy law}}
In the [[British Virgin Islands]], insolvency law is primarily codified in the Insolvency Act, 2003 and the Insolvency Rules, 2005.

===Canada===
{{main|Insolvency law of Canada}}
In [[Canada]], bankruptcy and insolvency are generally regulated by the [[Bankruptcy and Insolvency Act]]. An alternative regime is available to larger companies (or affiliated groups) under the [[Companies' Creditors Arrangements Act]], where total debts exceed $5 million.<ref name = CCCA>{{cite web | url = http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br03125.html | title = Restructure your business through the Companies' Creditors Arrangement Act | publisher = Office of the Superintendent of Bankruptcy Canada | access-date = 11 December 2014 | archive-date = 10 December 2014 | archive-url = https://web.archive.org/web/20141210160931/http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br03125.html | url-status = live }}</ref>

=== Germany ===
In [[Germany]], insolvency proceedings, both for companies and for natural persons, are regulated by the Insolvency Act ''(Insolvenzordnung),'' in effect since 1999 but with significant changes in 2012.<ref>[http://www.gesetze-im-internet.de/englisch_inso/ Insolvency Statute] {{Webarchive|url=https://web.archive.org/web/20190311192704/http://www.gesetze-im-internet.de/englisch_inso/ }} Bundesamt für Justiz</ref> The goal of insolvency law is the equal and best satisfaction of creditors.

If the interests of creditors are respected, insolvent companies are offered different ways to restructure their businesses, for example by implementing an 'insolvency plan' ''([[:de:Insolvenzplan|Insolvenzplan]])''. While regular insolvency proceedings are led by a court-appointed insolvency administrator, 'debtor-in-possession' proceedings are common since the legislative changes in 2012.

For natural persons, the ''Verbraucherinsolvenzverfahren'' (literally “insolvency proceeding for individual consumers”) allows discharge of all debts after three years, if certain conditions are met.

=== Hong Kong ===
{{main|Hong Kong insolvency law}}
In [[Hong Kong]], insolvency is primarily governed by the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) and the Companies (Winding Up) Rules (Cap 32H).

=== India ===
{{main|Insolvency and Bankruptcy Code}}
In [[India]], bankruptcy and insolvency are generally regulated by the [[Insolvency and Bankruptcy Code]] 2016. The [[Insolvency and Bankruptcy Board of India|Insolvency and Bankruptcy Board of India (IBBI)]] is the [[Regulatory agency|regulator]] for overseeing insolvency ''proceedings'' and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in [[India]].

=== Ireland ===
{{main|Bankruptcy Law in the Republic of Ireland|Liquidation in Ireland}}
In [[Ireland]], insolvency is governed by the [[Companies Act 2014]].

=== Russia ===
{{Main|Insolvency law of Russia}}
In Russia, insolvency law is governed by Federal Law No. 127-FZ "On Insolvency (Bankruptcy)" and Federal Law No. 40-FZ "On Insolvency (Bankruptcy) of Credit Institutions".

===South Africa===
{{unreferenced section}}
{{main|South African insolvency law}}
In [[South Africa]], owners of businesses that had at any stage traded insolvently (i.e. that had a balance-sheet insolvency) become personally liable for the business's debts. Trading insolvently is often regarded as normal business practice in South Africa, as long as the business is able to fulfill its debt obligations when they fall due.

===Switzerland===
{{main|Insolvency law of Switzerland}}
Under [[Switzerland|Swiss]] law, insolvency or [[foreclosure]] may lead to the seizure and auctioning off of assets (generally in the case of private individuals) or to [[bankruptcy]] proceedings (generally in the case of registered commercial entities).

===Turkey===
Turkish insolvency law is regulated by Enforcement and Bankruptcy Law (Code No: 2004, Original Name: İcra ve İflas Kanunu). The main concept of the insolvency law is very similar to Swiss and German insolvency laws. Enforcement methods are realizing pledged property, seizure of assets and bankruptcy.

===United Kingdom===
{{main|United Kingdom insolvency law}}

====Insolvency Act 1986====
In the [[United Kingdom]], the term [[bankruptcy]] is reserved for individuals. Insolvency is defined both in terms of [[cash flow]] and in terms of [[balance sheet]] in the UK [[Insolvency Act 1986]], Section 123, which reads in part:

{{Quote
|
123.-(1) A company is deemed unable to pay its debts ---<br />(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor,...
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities...
| [[Insolvency Act 1986]], Section 123 (Part IV, Chapter VI), p. 68.
}}

A company which is insolvent may be put into [[liquidation]] (sometimes referred to as winding-up). The directors and [[Shareholders in the United Kingdom|shareholders]] can instigate the liquidation process without court involvement by a shareholder resolution and the appointment of a licensed [[Insolvency Practitioner]] as liquidator. However, the liquidation will not be effective legally without the convening of a meeting of creditors who have the opportunity to appoint a liquidator of their own choice. This process is known as creditors voluntary liquidation (CVL), as opposed to members voluntary liquidation (MVL) which is for solvent companies. Alternatively, a creditor can petition the court for a winding-up order which, if granted, will place the company into what is called compulsory liquidation or winding up by the court. The liquidator realises the assets of the company and distributes funds realised to creditors according to their priorities, after the deduction of costs. In the case of [[Sole Trader Insolvency]], the insolvency options include [[Individual Voluntary Arrangements]] and [[Bankruptcy]].

====Procedures====
It can be a civil and even a criminal offence for directors to allow a company to continue to trade whilst insolvent. However, two new insolvency procedures were introduced by the [[Insolvency Act 1986]] which aim to provide time for the rescue of a company or, at least, its business. These are '''Administration''' and [[Company Voluntary Arrangement]]:

*'''Administration''' is a procedure to protect a company from its creditors in order for it to be able to make significant operational changes or restructuring so that it could continue as a going concern, or at least in order to achieve a better outcome for creditors than via liquidation. In contrast to Chapter 11 in the US where the directors remain in control throughout that restructuring process, in the UK an Administrator is appointed who must be a licensed [[Insolvency Practitioner]] to manage the company's affairs to protect the creditors of the insolvent company and balance their respective interests. Unless the company itself is saved by this process, the company is subsequently put into liquidation to distribute the remaining funds.
*A '''Company Voluntary Arrangement (CVA)''' is a legal agreement between the company and its creditors, based on paying a fixed amount lower than the outstanding actual debt. These are normally based on a monthly payment, and at the end of the agreed term the remaining debt is written-off. The CVA is managed by a Supervisor who must be a licensed [[Insolvency Practitioner]]. If the CVA fails, the company is usually put into liquidation.

One particular type of '''Administration''' that is becoming more common is called '''pre pack administration''' (more information under [[administration (law)]]). In this process, immediately after appointment the administrator completes a pre-arranged sale of the company's business, often to its directors or owners. The process can be seen as controversial because the creditors do not have the opportunity to vote against the sale. The rationale behind the device is that the swift sale of the business may be necessary or of benefit to enable a best price to be achieved. If the sale was delayed, creditors would ultimately lose out because the price obtainable for the assets would be reduced.

====Receivership====
In addition to the above-mentioned corporate insolvency procedures, a creditor holding security over an asset of the company may have the power to appoint an insolvency practitioner as administrative receiver or, in [[Scotland]], receiver. The process, latterly known as [[administrative receivership]] or, in Scotland, receivership, has existed for many years and has often resulted in a successful rescue of a company's business via a sale, but not of the company itself. Since the introduction of the collective insolvency procedure of '''Administration''' in 1986, the legislators have decided to set a shelf life on the [[administrative receivership]] or, in Scotland, receivership procedure and it is no longer possible to appoint an administrative receiver or, in Scotland, receiver under security created after 15 September 2003.

In individual cases the bankruptcy estate is dealt by an official receiver, appointed by the court. In some cases the file is transferred to RTLU (OR Regional Trustee Liquidator Unit) that will assess your assets and income to see if you can contribute towards paying costs of bankruptcy or even discharge part of your debts.

===United States===
{{Main|Bankruptcy in the United States}}
Under the [[Uniform Commercial Code]], a person is considered to be insolvent when the party has ceased to pay its debts in the [[ordinary course of business]], or cannot pay its debts as they become due, or is insolvent within the meaning of the [[Bankruptcy in the United States|Bankruptcy Code]]. This is important because certain rights under the code may be invoked against an insolvent party which are otherwise unavailable.

The [[United States]] has established insolvency regimes {{Citation needed}} which aim to protect the insolvent individual or company from the creditors, and balance their respective interests. For example, see [[Chapter 11, Title 11, United States Code]]. However, some state courts have begun to find individual corporate officers and directors liable for driving a company deeper into bankruptcy, under the legal theory of "deepening insolvency".<ref>{{cite journal
|ssrn=1377375
|title=A Critique of 'Deepening Insolvency,' a New Bankruptcy Tort Theory
|last=Thompson
|first=David
|journal=Stanford Journal of Law, Business & Finance
|year=2007
|volume=12
|issue=2
|pages=536
}}</ref>

In determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the legally declared bankruptcy, will usually be the primary consideration.

==See also==
* [[Solvency]]

==References==
{{reflist|30em}}

==Further reading==
*{{cite web|last=Mańko|first=Rafał|title=Cross-border insolvency law in the EU|url=http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2013/130476/LDM_BRI(2013)130476_REV1_EN.pdf|work=Library Briefing|publisher=Library of the European Parliament|access-date=21 February 2013|url-status=live|archive-url=https://web.archive.org/web/20131228193157/http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2013/130476/LDM_BRI%282013%29130476_REV1_EN.pdf|archive-date=28 December 2013}}

==External links==
{{Library resources box
|by=no
|onlinebooks=no
|others=no
|about=yes
|label=Insolvency }}
*[https://www.eulerhermes.com/content/dam/onemarketing/euh/eulerhermes_com/erd/map/insolvency-map/2018/insolvency-risk-q2-2018-map-Jun18.pdf Infographic Insolvency Risk Map Q2 2018 - Euler Hermes forecast] {{Webarchive|url=https://web.archive.org/web/20200307001612/https://www.eulerhermes.com/content/dam/onemarketing/euh/eulerhermes_com/erd/map/insolvency-map/2018/insolvency-risk-q2-2018-map-Jun18.pdf }}

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Insolvency - Revision history

Thecherrygarg at 19:53, 16 May 2022