Insolvency means the inability to pay one's debts as they fall due. Usually used in Business terms, insolvency refers to the inability for a 'limited liability' company to pay off debts.
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Insolvency means the inability to pay one's debts as they fall due. Usually used in Business terms, insolvency refers to the inability for a 'limited liability' company to pay off debts.
This is defined in two different ways:
- Cash flow insolvency -: Unable to pay debts as they fall due. An indicator of this on the balance sheet, is if there is "net current liabilities".
- Balance sheet insolvency -: Having negative net assets: liabilities exceed assets; or net liabilities.
A business may be cash flow insolvent but balance sheet solvent if it holds liquid assets, particularly against short term debt. Conversely, a business can have negative net assets showing on their balance sheet but still be cash flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default – for instance, if it holds long term debt.
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.
Definition in the UK
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:
- ''123. Definition of inability to pay debts
- ''(1) A company is deemed unable to pay its debts - 1
- (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. This is known as cash flow insolvency.
- (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. This is known as balance sheet insolvency.
Consequences of insolvency
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. In some jurisdictions, it is an offence under the insolvency laws for a corporation to continue in business while insolvent. In others, the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out.Fact: date=May 2008 Increasingly, legislatures have favoured alternatives to winding up companies for good.Fact: date=May 2008
It can be grounds for a civil action, or even an offence, to continue to pay some creditors in preference to other creditors once a state of insolvency is reached.Fact: date=May 2008
Costs of an IVA
An Insolvency Practitioner (IP's) will charge fees for setting up and supervising an IVA. It is very important that you shop around to make sure you are getting the best deal. Typical fees are over £4,000 (Approx $6000 as of Q1 2009) and sometimes a great deal higher. Many IPs will offer an initial free meeting to look at whether an IVA is suitable in your situation. Some IPs will only accept payment of their fees up front. Other IPs will allow you to pay the fees as part of the monthly payments over the term of the IVA.
