Generally people mix the two terms Insolvency and Bankruptcy. Even though they might relate to or identify the state of the company or individual which is ‘one’ but both the terms are different and should not be used as analogous to each other.
Simply speaking Insolvency is the financial state of a being where the Individual or Company or family has lost the capability to pay off their debts to the creditors. When any individual or entity is not able pay back the debts to the creditors on time and does not have the financial viability of discharging oneself from the liability then the individual or entity is known as insolvent.
In case of a company when the inflow of cash in less than the outflow of cash i.e. the sum invested by the company into the business more than what the company is earning from the business of the Company, also when the value of assets along with the money flow into the company is less than the liabilities and money outflow from the company.
When a company is involved into some business of manufacturing certain products which are to be supplied to various distributors, now initially the demand of that particular product in the market was at high rate but somehow in the later stage of the business the demand of those products suddenly fell due to which the Company is not able to generate the revenue which was earned earlier by the company but the expense in lieu of the production remains same i.e. high. Therefore, this decline in the revenue of the company which consequently leads to the situation of financial inability of the company as the liabilities keep on exceeding the assets or the debts exceeding of the company and make the company insolvent.
Bankruptcy is termed as legal declaration of insolvency i.e. one’s inability to pay off debts. Insolvency is just the state where the financial inability is reached whereas the bankruptcy is the realization and announcement of that the state of being insolvent.
What is the benefit of being declared as insolvent or undergo the bankruptcy?
When an individual or a company is financially incapable of paying off its debts in time or the value of assets stands less than the value of the liabilities, then by undergoing the process of bankruptcy debtors figure out a plan or restructure its payment plans to be easily met with the help of government or adjudicating authority. There are mainly two forms of bankruptcy:-
Resolution bankruptcy process
As the name suggests this bankruptcy takes place to reorganize or find a resolution to pay off the debts in a timely manner. this is also called Corporate Insolvency Resolution Process as per the Insolvency and Bankruptcy Code, 2016 wherein the business of the company is run afresh with some new plans pursuant to which the whole company is under the control of Insolvency Professional who finds a best feasible way out to discharge the liabilities of the company.
Liquidation bankruptcy process
If the resolution process does not work properly and no viable resolution so as to discharge the liabilities has been reached then the liquidation takes place pursuant to which all the assets of the company are sold or disposed of in the best possible manner, thereafter, the sale proceeds are utilized to pay off the debts owed by the company to the creditors.
Disclaimer – Please note that the above articles is based on the interpretation of related laws and judicial pronouncement which may differ from person to person. The reader are expected to take the expert opinion on the matter.