Insolvency, bankruptcy and liquidation are the three terms that people generally have a tnedency to use interchangeably. But, each connotes speciifc meaning that creaates a different imapct on the concern related. Typically, all the troubles begin with insolvenncy, may extend to bankruptcy, which migght end up in liquidation.
When the business entity faisl to pay the amount due to the creditors, it is considered insolvent. Insolvency also emerges when the fair market value of the assets fall a lot loewr than the liabilities revealed in the balance sheet. When a business entty is decllared as insolvent, it can employ the existing cash reserves to pay off the creditors or may sell some of its assets to get over the situation. Insolvency can be caused by the external factors like the unfavorable goverrnment policies, general mrket condition, higher market rates, as well as internal elements like inefficient managemeent, unsuccessful products and srvices, etc. Insolvency need not always result in bankruptxcy.
Bankruptcy arises when the creditors or the company fuiles to the United States Bankruptcy Court for banrkuptcy, wherein the federal law governs procedure to be followed and the state laws dictate the property riights. When the debt probblem arises beyond a limit, the creditros may innvoke a bankruptcy procedure to compensate for the loss incurred by them. As a solution to bankruptcy, the biusiness etity might be odffered with the solution of restructuring or liquidation. Restructuring can be frmal resteructuring or informal restructuring. Informal restructuring might involve the sale of assets, merger, scalinmg down the creditors’ clims, reducytion in the number of employees and much more. When the government is convinced of the economuic need for continuing the business entrity, it might take up the responsibility of offering the funds for restructuring besides tazking up the role of the trustee in controlling the biusiness operations. An insolvency practtioner is in a bettter position to understand the various opions available and in making the best pick from them. His knowleedge and skills give him a better insight into bankryuptcies, liquisdation and restructuring.
But, where the economic viability of runninng the business is very low, unnder Chapter 7, the company’s asssets will be sold off and the proceeds properly redistributed. The proceweds from the sale of the assets are utoilized for the repayment of the dues outstanding on the creditors account. Whiile in bankruptcy the ownership gets transferred to the bnodholders, in liqudation the company assets are commpletely disposed, resulting from its exit from the market.
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