Solvency
From Wikipedia, the free encyclopedia
In finance, solvency is the ability of an entity to pay its debts with available cash. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth. The better a company's solvency, the better it is financially. When a company is insolvent, it means that it can no longer operate and is undergoing bankruptcy.
Solvency is a different concept from profitability, which refers to the ability to earn a profit. Businesses can be profitable without being solvent (e.g. when they are expanding rapidly). Businesses can be solvent even while losing money (e.g. when they cannibalize future cash flows, like selling accounts receivable). A business is bankrupt when it is unprofitable and insolvent.
[edit]See also
Insolvency
From Wikipedia, the free encyclopedia
Insolvency means the inability to pay debts when they fall due.
This is different to having negative net assets. A business can have negative net assets showing on their balance sheet but still be solvent if ongoing revenue is able to meet debt obligations.
Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency.
The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the liquidation and elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencingfinancial distress so as to permit the rehabilitation and continuation of their business. In some jurisdictions, it is an offence under the insolvency laws for a corporation to continue in business while insolvent. In others, the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out.[citation needed] Increasingly, legislatures have favoured alternatives to winding up companies for good.[citation needed]
It can be grounds for a civil action, or even an offence, to continue to pay some creditors in preference to other creditors once a state of insolvency is reached.[citation needed]
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[edit]Debt restructuring
Out-of court debt restructurings, also known as workouts, are increasingly becoming a global reality. Debt restructurings are typically handled by professional insolvency and restructruing practitioners, and are usually less expensive and a preferrable alternative to bankruptcy.
Debt restructuring is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its deliquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.
[edit]Government debt
Although the terms bankrupt and insolvent are often used in reference to governments or government obligations, a government cannot be insolvent in the normal sense of the word. Generally, a government's debt is not secured by the assets of the government, but by its ability to levy taxes. By the standard definition, all governments would be in a state of insolvency unless they had assets equal to the debt they owed. If, for any reason, a government cannot meet its interest obligation, it is technically not insolvent but is "in default". As governments are sovereign entities, persons who hold debt of the government cannot seize the assets of the government to re-pay the debt. However, in most cases, debt in default is refinanced by further borrowing ormonetized by issuing more currency (which typically results in inflation and may result in hyperinflation).
[edit]Insolvency law in individual countries
[edit]South Africa
In South Africa, owners of businesses that had at any stage traded insolvently (i.e. that had a balance-sheet insolvency) become personally liable for the business' debts. Trading insolvently is often regarded as normal business practice in South Africa, as long as the business is able to fulfil its debt obligations when they fall due.
[edit]United Kingdom
In the United Kingdom, it is a criminal offence to trade whilst insolvent. However, there are insolvency practices ("Administrators") which aim to protect the creditors of the insolvent individual or company and balance their respective interests. Alternatives such as Company Voluntary Arrangements and Administration in the UK reflect this shift towards a rescue culture.
When determining whether a gift or a payment to a creditor is an unlawful preference, both the date of the insolvency and the date of the bankruptcy – the liquidator or administrator will be able to recover money paid to a creditor as a preference if paid within six months (or two years if the creditor is a person connected to the company) preceding the date of liquidation and the company was insolvent at the time. In addition to unlawful preferences, liquidators and administrators in the UK may also challenge transactions at an undervalue, extortionate credit transactions, some floating charges and transactions defrauding creditors.
In the UK, the term bankruptcy is reserved for individuals; a company which is insolvent may be put into liquidation (sometimes referred to as winding-up).
[edit]United States
Under the Uniform Commercial Code, a person is considered "insolvent" when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due, or is insolvent within the meaning of the Bankruptcy Code. This is important because certain rights under the code may be invoked against an insolvent party which are otherwise unavailable.
The United States has established insolvency regimes which aim to protect the creditors of the insolvent individual or company and balance their respective interests. For example, see Chapter 11, Title 11, United States Code.
In determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the legally-declared bankruptcy, will usually be the primary consideration.
[edit]Switzerland
Under Swiss law, insolvency or foreclosure may lead to the seizure and auctioning off of assets (generally in the case of private individuals) or to bankruptcy proceedings (generally in the case of registered commercial entities).
[edit]Bibliography
- Born Losers: A History of Failure in America, by Scott A. Sandage (Harvard University Press, 2005).
[edit]References
 | This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed. (June 2007) |
[edit]See also
- Liquidation
- Administrative receivership
- Administration order
- Administration (insolvency)
- Debt
- Debt restructuring
- Financial distress
[edit]External links
