what is insolvency

Insolvency is a financial state in which a person or company is unable to pay their debts. There are two forms of insolvency: cash-flow insolvency and balance-sheet insolvency. Cash-flow insolvency is when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment. Balance-sheet insolvency is when a person or company does not have enough assets to pay all of their debts. Insolvency can arise from poor cash management, a reduction in cash inflow, or an increase in expenses. Insolvency can lead to insolvency proceedings, in which legal action will be taken against the insolvent person or entity, and assets may be liquidated to pay off outstanding debts. However, before an insolvent company or person gets involved in insolvency proceedings, they may be involved in informal arrangements with creditors, such as setting up alternative payment arrangements. If the interests of creditors are respected, insolvent companies are offered different ways to restructure their businesses, for example by implementing new management strategies or selling assets. It is important to note that insolvency is not the same as bankruptcy, although a company that has become insolvent may file for bankruptcy.