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Corporate Bankruptcy

Corporate Insolvency

A company is regarded as technically insolvent if it is unable to meet its current obligations.  Such insolvency may be temporary and subject to remedy.   

Technical insolvency means a lack of liquidity.  Insolvency in bankruptcy means that the liabilities of a company exceed its assets; in other words, the net worth of the company is negative.   

Financial failure includes the entire range of possibilities between these extremes. The solutions available to save a failing company vary in severity according to the degree of financial difficulty.   

Many failing firms can be re-organized to the gain of creditors and shareholders.  Although the major purpose of a liquidation or reorganization is to protect creditors, the interests of the owners are also considered.  

If the outlook is sufficiently hopeless, liquidation may be the only feasible alternative.  If there is little prospect for profitable operations creditors will want to liquidate the company and take whatever losses they must at the time. The causes of financial difficulty may be related to internal or external causes:

·         Inadequate sales

·         Competitive weakness

·         Poor location

·         Business operating factors

·         Management

·         Heavy operating expenses

·         Inventory difficulties

·         Receivables difficulties

·         Excessive amount of fixed assets

·         Disaster, Neglect, Fraud

When the underlying cause is external, and there is no way for management to curtail losses, the inevitable result is liquidation.

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