Options Available For A Concern In Insolvency

By Author: Paul Smythe
Total Articles: 10
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The last few months have witnessed a huge downfall in the economy of the world. The housing bubble took its toll on every industry, which saw the efficient companies bringing down the cost of their goods and services significantly, much to relief of the customers. On the other hand, the companies run by incompetent management were forced to mark their exit from the scene. These companies were burdened by the debt problem with many considered insolvent.

Insolvency arises when the liabilities exceed the assets or the individual or the entity becomes unable to meet the financial obligations on time while its due. A business concern that is on the verge of insolvency will begin the process of turning around the financial situation of the concern by utilizing a portion of the cash reserves or through the sale of certain assets. But, where these become insufficient to meet the obligations, then the management will be forced to file the petition for bankruptcy.

Typically the creditors or the management of the company approaches the United States Bankruptcy Court to invoke bankruptcy. The legal authorities, on the receipt ...
... of the petition, will evaluate the true state of affairs. The legal and economic feasibility of the concern is highly crucial in the final outcome. If a company is found to hold a pivotal place in the society and it is the financial limitations that are preventing its progress forward, the Court may place the order for restructuring.

The management can go for formal or informal restructuring. An informal restructuring can take the form of mergers for ensuring better prospects in the future. Sometimes the management will come into an informal agreement with the creditors who will be willing to extend the date of repayment or to go for partial repayment of the amount outstanding, presenting the debtor a fresh start to revive the business. Where it is not plausible, but the law authorities are apprehensive of the economic burden it will impose on the society, it will request for formal restructuring.

The formal restructuring entrusts the management of the firm to a trust who will ensure that the funds offered for recuperating has been utilized in the desired manner. Sometimes it will call for the shutdown of ineffective business divisions, with more concentration on R&D for meeting the demands of the future. Formal restructuring is not met with the appreciation of the shareholders and the management as the control of operations lies in the hands of the trust.

Where the legal authorities do not visualize the potential of the company continuing as a going concern, they may request for liquidation under Chapter 7. All the assets get disposed with the money utilized to meet the obligations.

Whatever be the solution sought, it is always better to seek the services of an insolvency practitioner as he is knowledgeable on the best approach to the problem.

The author of this article has dealt with many Debt Problems. Being an Insolvency Practitioner the author writes great articles on Liquidation and insolvency.