Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Here Is Everything You Must Know About Insolvency

Companies / SME Oct 10, 2020 - 03:50 PM GMT

By: Sumeet_Manhas

Companies

When a company commences business in the market, it has set objectives, functions, and roles. No corporation ever dreams of going into liquidation of becoming insolvent. The framework of law provides specific guidelines, rules, and regulations to assist the procedure of insolvency. Usually, insolvency takes place when the company is going in loss; it is not able to manage its finances and is thriving to survive in the market. Insolvency of a company has a lot to do with the law rather than the dynamics of the market. The internal functionality of corporations has to be transparent with the authorities to not land up in any form of legal action. Let us now understand the meaning and procedure of insolvency and legal accompaniments along with it. 


What is insolvency?

Insolvency has been defined in various legal literature and by famous authors and professionals in practice. However, insolvency, in common patience, means when a firm, an individual, or a company is unable to pay their dues advanced by the money lenders. It is essentially a state of financial distress for the individual or company where the financial obligations cannot be fulfilled or satisfied.  

Since the creditors demand their dues along with interest, the companies have to sell their assets, and individuals have to sell their personal property to indemnify the loan amount advanced by lenders. Informal arrangements and dealings are also made with the creditors to reduce the payments and provide cash management. 

Insolvency and Bankruptcy Code 

The most common cause of insolvency is poor cash flow in a company. When the dealings are made purely based on credit with creditors and debtors, it results in an impoverished cash management system that is likely to break. The Insolvency and Bankruptcy Code is a set of rules, regulations, guidelines, and bylaws degrading the procedure to be carried during insolvency. 

This code has come into existence because there was no clear demarcation of insolvency and bankruptcy in several other statutes. The code provides for the provisions for companies and individuals to conduct a regulatory and transparent resolution process for insolvency. It is a legislative framework to safeguard the interests of debtors and claims of creditors about the company. 

Factors leading to insolvency 

Several reasons primarily lead to the bankruptcy of an individual or a company. The following are some of the factors that contribute to insolvency:

  • Hiring inadequate human resources to operate the functions of business

  • Overspending from the allowed company budget in areas that do not require such amount of expenditure

  • Increased costs and prices of material from vendors and suppliers putting them on credit

  • Overdrawn directors loan account causing increased credit 

  • Unpaid bills of the creditors for an extended period leading to increased interests on loans

  • Not adapting the products and services as per the market dynamics; sticking to traditional methods of business

  • Losing revenues from debtors and customers causing low profits

Insolvency professionals and agencies

The code was built to facilitate the process of resolution and insolvency smoothly.  To make sure that there is transparency in the mechanisms and all the legal provisions are being complied, the code calls for the appointment of several institutions. Insolvency professionals and agencies are those institutions that are licensed to practice the work of insolvency for the companies. 

They have the sole responsibility of the management of assets, disbursing, and paying off the creditors, providing information to the stakeholders, and making the right decisions for the company. The insolvency professional handles all the operations of the company until the procedure of insolvency is not completed. 

Procedure of insolvency 

The procedure of bankruptcy has to be strictly followed by insolvency professionals. The following steps must be followed:

  • How to initiate

It is necessary to determine who initiates the process of insolvency. The application for the initiation of the resolution process for bankruptcy can be made either by the debtor or by the creditor. This entire procedure is administered and supervised by the insolvency professional. No legal action is allowed for 180 days of this period by any party against the company. 

  • Decision making

An insolvency professional is obligated to form a committee of financial creditors of the company. The financial creditors are those parties who have lent money to the company. They have the power to decide the further outstanding debts of the company. The most common way of repayment is seeking the assets of the company and paying off the creditors. The decisions have to be taken within 180 days; after that, the assets of debtors can be liquidated. 

  • Process of liquidation 

Once the insolvency process comes at the point of liquidation, the procedure of liquidation commences. In liquidation, the assets of the company are sold off to obtain financial resources to pay off the creditors. There is a sequence in which financial creditors, unsecured creditors, insolvency costs, workers' payment, and equity shareholders have to be paid. 

By Sumeet Manhas

© 2020 Copyright Sumeet Manhas - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in