Insolvency 1335092 225970929 2008-07-16T07:20:02Z Sandstein 359256 /* South Africa */ typo '''Insolvency''' exists for a person or organization when total financial [[liabilities]] exceed total financial [[assets]]. A related financial condition, sometimes referred to as '''cash-flow insolvency''', exists when a person or organization can not meet its financial obligations as they come due. In business situations, accountants in the [[US]] refer to this as a '''''[[working capital]] deficit'''.'' Insolvency is not a [[synonym]] for '''''[[bankruptcy]]''''', which in the [[US]] is a determination of insolvency made by a [[court of law]] with resulting legal orders intended to resolve the insolvency. The principal focus of modern insolvency legislation and business [[debt restructuring]] practices no longer rests on the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing [[financial distress]] so as to permit the rehabilitation and continuation of their business. In some jurisdictions, it is an [[offence]] under the insolvency laws for a [[corporation]] to continue in business while insolvent. In others, the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out.{{Fact|date=May 2008}} Increasingly, legislatures have favoured alternatives to winding up companies for good.{{Fact|date=May 2008}} It can be grounds for a civil action, or even an offence, to continue to pay some [[creditor]]s in preference to other creditors once a state of insolvency is reached.{{Fact|date=May 2008}} ==Debt restructuring== Out-of court '''[[debt restructuring]]s''', also known as workouts, are increasingly becoming a global reality. Debt restructurings are typically handled by professional insolvency and restructruing practitioners, and are usually less expensive and a preferrable alternative to bankruptcy. [[Debt restructuring]] is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its deliquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations. ==Government debt== Although the terms bankrupt and insolvent are often used in reference to governments or [[government]] obligations, a government cannot be insolvent in the normal sense of the word. Generally, a government's debt is not secured by the assets of the government, but by its ability to levy [[taxes]]. By the standard definition, all governments would be in a state of insolvency unless they had assets equal to the debt they owed. If, for any reason, a government cannot meet its [[interest]] obligation, it is technically not insolvent but is "in [[default (finance)|default]]". As governments are [[sovereignty|sovereign]] entities, persons who hold debt of the government cannot seize the assets of the government to re-pay the debt. However, in most cases, debt in default is [[refinancing|refinanced]] by further borrowing or [[monetization|monetized]] by issuing more [[currency]] (which typically results in [[inflation]] and may result in [[hyperinflation]]). ==Insolvency law in individual countries== ===South Africa=== In [[South Africa]], owners of businesses that had at any stage traded insolvently (i.e. that had a balance-sheet insolvency) become personally liable for the business' debts. Trading insolvently is often regarded as normal business practice in South Africa, as long as the business is able to fulfil its debt obligations when they fall due. ===United Kingdom=== {{main|UK insolvency law}} In the [[United Kingdom]], it is a criminal offence to trade whilst insolvent. However, there are insolvency practices ("Administrators") which aim to protect the creditors of the insolvent individual or company and balance their respective interests. Alternatives such as [[Company Voluntary Arrangement]]s and [[Administration (insolvency)|Administration]] in the UK reflect this shift towards a rescue culture. When determining whether a gift or a payment to a creditor is an unlawful preference, both the date of the insolvency and the date of the bankruptcy – the liquidator or administrator will be able to recover money paid to a [[creditor]] as a preference if paid within six months (or two years if the creditor is a person connected to the company) preceding the date of liquidation and the company was insolvent at the time. In addition to unlawful preferences, liquidators and administrators in the UK may also challenge transactions at an undervalue, extortionate credit transactions, some floating charges and transactions defrauding creditors. In the UK, the term bankruptcy is reserved for individuals; a company which is insolvent may be put into [[liquidation]] (sometimes referred to as winding-up). ===United States=== Under the [[Uniform Commercial Code]], a person is considered "insolvent" when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due, or is insolvent within the meaning of the [[Bankruptcy Code]]. This is important because certain rights under the code may be invoked against an insolvent party which are otherwise unavailable. The [[United States]] has established insolvency regimes which aim to protect the creditors of the insolvent individual or company and balance their respective interests. For example, see [[Chapter 11, Title 11, United States Code]]. In determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the legally-declared bankruptcy, will usually be the primary consideration. ===Switzerland=== {{main|Insolvency law of Switzerland}} Under [[Switzerland|Swiss]] law, insolvency or [[foreclosure]] may lead to the seizure and auctioning off of assets (generally in the case of private individuals) or to [[bankruptcy]] proceedings (generally in the case of registered commercial entities). ==Bibliography== *''Born Losers: A History of Failure in America'', by Scott A. Sandage (Harvard University Press, 2005). ==References== {{Unreferenced|date=June 2007}} {{reflist}} ==See also== * [[Liquidation]] * [[Administrative receivership]] * [[Administration order]] * [[Administration (insolvency)]] * [[Debt]] * [[Debt restructuring]] * [[Financial distress]] ==External links== {{Wiktionary}} *[http://www.insolvency.gov.uk/ UK Government Insolvency Service] *[http://www.europeanpayment.com Insolvencies in Europe - Consequences on bad-debt write-off rate in Europe (26 countries)] *[http://www.insolvency.govt.nz Insolvency and Trustee Service of New Zealand] [[Category:Insolvency law| ]] [[Category:Finance]] [[Category:Bankruptcy]] [[de:Insolvenz]] [[es:Insolvencia]] [[ja:債務超過]] [[nl:Insolventie]] [[pl:Upadłość]]