When we talk about corporate insolvency, it becomes important to understand what it is and how does it impact the business. Basically, insolvency is a situation in which an individual or an organisation is not able to meet its financial obligations, and they choose to get involved in informal agreements with creditors, like setting up an alternative mode of payment.
There can be several factors that result in insolvency, like reduced cash flow, poor management of cash, or rising expenses.
Key points about insolvency:
- It is a state of financial distress in which a company or an individual is not able to repay the bills
- Such a situation can arise because of poor cash flow
- You must know that insolvency is different from bankruptcy
Now, let’s shift our focus to corporate insolvency or business insolvency. As you can decipher from the name, it is a condition in which a business entity becomes incapable of repaying its debts. Sometimes, business contract problems or business associate failures may result in insolvency.
Common factors that may result in corporate insolvency:
There are several reasons that may result in the failure of business, leading to insolvency:
- Lack of expertise- One of the reasons that companies are not able to meet their financial obligations is the lack of expertise in running their business operations. It increases the risk, thus may lead to failure of the business.
- Incomplete information about business practices– Even the simplest of business practices is important for the successful functioning of any company. In case a company fails to adhere to the same, it results in the failure of business, thus leading to lack of cash flow, thereby resulting in insolvency.
- Lack of resources- If you are running a business, it is important that you must have enough resources to meet your financial expenses. Many times, a business that fails to do so will have to face corporate insolvency.
- Excess of expenditure- One of the reasons for business insolvency is excess of expenditure, and that too without proper cash flow.
- Failure of clients to pay money- Businesses are often dragged down to insolvency because their clients did not pay the owed money in time.
- Stiff competition in the market– Sometimes, a business may venture into a sector in which the competitors already have a strong foothold. In such a case, a company may not be able to sustain growth and get enough money, thus leading to insolvency.
What is the result of corporate insolvency?
In case a business goes in for insolvency, it may result in either of the following situations:
- Receivership- It is a situation in which a bank appoints a receiver to sell the assets of the failed business. It arises when a business can be saved or recovered.
- Liquidation- This arises when the business is not considered salvageable. The business gets wound up either because of voluntary liquidation, or liquidation process is conducted by a person appointed by creditor or the court.
Is business insolvency beneficial?
Well, there might arise a condition when a company is not able to recover from debts, and in such a case, it has to go for corporate insolvency via liquidation. It has the following benefits:
- There are no more debts after the process of liquidation
- Lower one-off cost
- Leases can be cancelled
- Relieve the creditors from pressure
With these sets of advantages, companies going for business insolvency can benefit and also pay off their debt. One must always take consultation from legal entities or corporate lawyers who would help them understand the same and know the available options.