Insolvency means that a company’s debts can no longer be paid when they become due, or that the value of the business’s assets is less than its total liabilities. The term insolvency can be applied to both businesses and individuals. There are two different types of insolvency: cash flow and balance sheet insolvency.What does insolvent mean in business be experiencing a short-term cash flow issue, which does not necessarily make it insolvent. It may also be suffering from a balance sheet issue that could be fixed through negotiations with creditors.
The easiest way to check if a company is insolvent is to calculate its total liabilities and compare them with its total assets. Simply list all of a company’s debts (including bank loans, credit card debts, and more) and add up its assets such as property, stocks and savings accounts. Then compare these figures to see if the liabilities outweigh the assets.
Shedding Light on the Insolvency Phenomenon in Business
If a company is declared insolvent, it will be subject to liquidation whereby its assets will be sold and the proceeds distributed to creditors according to an established priority. The insolvency practitioner responsible for the operation will oversee this process.
Companies that are close to insolvency can be helped by experts, often through debt restructuring and refinancing. However, sometimes the problems are more serious and the best option is to wind up the business. Directors of an insolvent company must act in the interests of creditors and must be transparent with them about what is happening.