What Is Insolvency?

When a company or individual is insolvent, they are unable to pay their debts as they become due. The circumstances leading to insolvency are varied, and can include poor financial planning, a change in market trends, or simply taking on too much debt. In some instances, insolvency is the result of a director’s misconduct or fraudulent business activity.

One of the primary objectives of insolvency law is to maximize value for creditors. This is pursued both during rehabilitation, when a business can be kept viable, and in procedures that liquidate enterprises that cannot be saved. Achieving this objective requires balancing the interests of various stakeholders, including shareholders and directors, as well as maintaining a fair allocation of risk.

In addition to maximizing value, the legal profession also strives to ensure that insolvency lawyers creditors receive as much of the value of the assets they are owed as possible. This is especially important for large corporate insolvencies, which may involve multiple jurisdictions and complex transactions. This is why the legal community maintains a set of principles that govern the handling of these cases.

For example, insolvency law provides for a period of time during which certain transactions and transfers are prohibited, known as avoidance provisions. These provisions aim to prevent insiders from using their privileged position as an insolvent debtor to benefit themselves at the expense of creditors. Insolvency laws differ across countries, but most of them allow for the nullification of transactions and transfers that occur prior to the commencement of insolvency proceedings and where there is evidence of a subjective intent to defraud creditors by placing assets beyond their reach.

Other factors that can lead to insolvency include excessive debt, rising costs, and failing to adapt to changing consumer tastes and preferences. Many businesses rely on credit cards and loans to fund operations, but the interest rates associated with these debts can quickly add up. In addition, the cost of raw materials and labor can increase significantly without companies being able to foresee these expenses.

As a result, when a company experiences a loss in revenue or is unable to cover its expenses, it is likely to face insolvency. The legal definition of insolvency is a state of being in which a person’s liabilities exceed his or her assets, but the concept is complicated and highly situational. Insolvency is a serious matter that can have a profound impact on individuals and the economy, and can be difficult for businesses to recover from.

If you believe that you or your business are experiencing insolvency, it is important to seek out the advice of an experienced insolvency?lawyer as soon as possible. Our skilled team of professionals has extensive experience in the reorganization and restructuring of financially troubled businesses, representing secured lenders, landlords, trustees, purchasers of assets, creditors’ committees, and debtors in federal bankruptcy and state insolvency proceedings. We also regularly serve as receivers, mediators, examiners, and in other court-appointed positions. Contact us for a consultation.