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Insolvency is when an individual, corporation, or other organization cannot meet its financial
obligations for paying debts as they are due. I nsolvency can occur when certain things happen, some
of which may include: poor cash management, increase in cash expenses, or decrease in cash flow.
A finding of insolvency is important, as specific rights are enabled for the creditor to exercise against the
insolvent individual or organization. For example, outstanding debts may be paid off by liquidating assets
of the insolvent party. Prior to proceedings, it is common for the insolvent entity to meet with the creditor
in order to attempt to arrange an alternative payment method.
It is possible that a business may be "insolvent" in cash flow, yet still solvent on the balance sheet. These
cases may involve illiquid assets, which help the balance sheet’s solvency but not the cash flows. This can
also work the other way around with negative net assets (balance sheet insolvency), yet a positive cash
flow. In this case, the flow of cash is simply enough to pay off debts, despite the fact that the business has
more liabilities than assets.
Bankruptcy
Bankruptcy is not exactly the same as insolvency. Technically, bankruptcy occurs when a court has
determined insolvency, and given legal orders for it to be resolved.
Bankruptcy is a determination of insolvency made by a court of law with resulting legal orders intended
to resolve the insolvency.
Insolvency describes a situation where the debtor is unable to meet his/her obligations.
Bankruptcy is a legal maneuver in which an insolvent debtor seeks relief.
In the dying stages of winding up proceedings, there is stacking of pr iorities running from the secured
creditors fr om out of their assets securing their claims, subject to the claims of the wor kmen, further,
the costs and expenses of winding up under Section 530 (6), then, the preferential creditors under
Section 530 (1), the floating charge holders and the unsecured creditors.
There are other statutor y preferential payments for taxes, revenues and cess, wages or salary for
past due prior to winding up or for period not exceeding 4 months when there is a continuing employment
for the beneficial winding up and for provident fund, pension and other claims.
Rules of insolvency for valuation of annuities and contingent liabilities as are prescribed by the Provincial
Insolvency Act and the Presidency Town Insolvency Act continue to apply.
Also, any transfer of property, deliver y of goods, payment, execution or other act relating to the property
made, taken or done by or against the company within six months pr ior to commencement of winding up
be deemed a fraudulent preference.
Corporate restructuring
Just like a person requires treatment to treat his disease, a sick company also requires some form of
treatment to overcome its problem of debts. This treatment may be in the form of restructuring of a
company.
Restructuring is the corporate management term for the act of reorganizing the legal, ownership,
operational, or other structures of a company for the purpose of making it more profitable, or
better organized for its present needs. Alternate reasons for restructuring include a change of
ownership or ownership structure, demerger, or a response to a cr isis or major change in the business
such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate
restructuring, debt restructuring and financial restructur ing.
In fact, the basic idea behind corporate restructuring and insolvency is to save companies,
preserve businesses and improve returns .