Definition - Insolvency Bankruptcy
Area of Law: Insolvency Bankruptcy

Insolvency/Bankruptcy


Insolvency/bankruptcy usually refers to a businesses inability to pay off its debts.

Bankruptcy is a formal determination of insolvency made by a court of law with associated legal orders made with the intent of resolving the insolvency.

Business insolvency is defined in the Insolvency Act 1986 in two separate ways - cash flow insolvency and balance sheet insolvency.

Businesses can be cash flow solvent but balance sheet insolvent and vice versa and this is an ongoing operational reality for many companies.

Providing the company has sufficient illiquid assets or sufficient cash flow to meet its debt obligations it is not insolvent.

A company that is insolvent can be put into liquidation, either voluntary or compulsory, where the company assets are sold to meet its debt obligations.

Bankruptcy is a legal status assigned to a person (sole proprietor) or partnership unable to meet its debts.

Bankruptcy is commonly initiated by the debtor and bankruptcy proceedings cannot be brought against an individual not involved in business.

A Bankruptcy Order may only be granted by a court after the presentation of a petition.

The court will appoint a trustee in bankruptcy who must either be an Official Receiver or a licensed Insolvency Practitioner.

A bankruptcy order will usually last no longer than 12 months and can, in fact, be less if the Official Receiver completes his investigations.

Under the terms of a Bankruptcy Order there are usually restrictions on the bankrupt person, such as not raising credit without prior permission and not acting as a company director.

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Insolvency/Bankruptcy Specialists