Bankruptcy Vs Insolvency

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Bankruptcy and liquidation have something in common, which is insolvency. Insolvency comes before liquidation or bankruptcy. If the business liabilities exceed its assets, it’s insolvent and, by law, must stop trading. If the business cannot pay its bills, it’s insolvent.  

If an individual cannot pay their debts when they’re due, the individual or natural person is insolvent. However, the individual and the business must apply for the status of bankruptcy. In the case of a business, the process is called liquidation. When it’s a natural person, it’s called sequestration. 

A business can be liquidated voluntarily by its directors, members, or shareholders, even if it’s profitable and solvent. This can be done once a business has served its purpose and is no longer required. You can even liquidate a shelf company to prevent any legal action against the entity in future. 

The insolvency attorneys consider the business cash flow to determine when the company or business could no longer pay its bills. The same holds true for the individual. Bank statements and bills from creditors, in addition to the individual’s asset list and earnings, are inspected to determine whether the individual is indeed insolvent and needs to apply for voluntary sequestration or file for bankruptcy. 

Signs of insolvency for a business include several and ongoing losses, overdue taxes, ratio of debt or liabilities to business assets. Not having access to finance to pay off the debt or to continue trade, not being able to get more equity capital, supplier payment demands before any further goods will be delivered. Dishonoured cheques, returned debit orders, payments to creditors not corresponding to invoices, and the inability to produce financial information to show the exact financial state of the business for a specific date.  

Tell-tale signs of insolvency for an individual are late payments to creditors, rounded figures of payments not corresponding to the creditor statements or invoices. Transferring of money from one account to another in order to make payments or to have cash available, missed debt payments and creditors remaining unpaid. The inability to get more finance, or at least debt consolidation assistance, overdue taxes, and returned debit orders. 

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