Insolvency and bankruptcy are the two most feared words for any entity – it is the Zone from which companies emerge or perish – and though in colloquial parlance the terms are used interchangeably, insolvency and bankruptcy are not synonymous.
Insolvency is not a legal term and just describes the condition of any person or business unable to pay off their debts on time. When the cash flow in a business drops significantly and the liabilities cannot be met, the business is said to be insolvent, even if the value of its illiquid assets is higher than the liabilities. However, it does not necessarily make Bankruptcy imminent as there are many ways to come out of insolvency and restructure the business.
Bankruptcy, on the other hand, is a legal term and a legal process that serves the purpose of resolving the issue of insolvency. In some countries, such as U.K., bankruptcy applies to a person or partnerships but not to a business. A different legal term ‘liquidation’ is used instead.
Fortunately, most developed economies today have recourse to debt management, consolidation or restructuring schemes as alternatives to bankruptcy in dealing with insolvency and the central focus of their modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress, so as to permit the rehabilitation and continuation of the business.
Spain, for example, passed a bankruptcy law (Ley Concursal) in 2003 which provides for debt settlement plans that can result in a reduction of the debt (maximally half of the amount) or an extension of the payment period of maximally five years, but it does not foresee debt discharge.
In short, developed economies not only have a more centred approach to the problems that affect companies in distress but they have also understood that business are more valuable while operational and should not be held to ransom by a few creditors.
In order to resolve these and other legal problems clients face in today’s intensely competitive business environment, prominent law firms, such as Quabbala Limited, www.quabbala.com, have highly specialized international Lawyers working as a cohesive legal team throughout their worldwide network of offices, that focus on achieving their client´s goals via the most practical and effective paths to resolution, including a fresh start for most business.