Month: July 2021

Rescue is a necessary intervention when a company is insolvent to prevent the company from failing. Put differently, a rescue can be referred to as a remedial action taken when the corporation is in distress. To restructure its affairs the corporation needs an arrangement with its creditors considering that it may not afford to pay everyone.

The end results of a rescue can often be referred to as arrangements, restructurings or reorganizations. Globally rescue is becoming widely accepted and liquidation is only considered as a tool of last resort when the rescue process is unable to bring the company back to solvency.

State of economic

The corporation is an abstract entity that carries on an economic activity called a business. As a result of this, the corporation is separate from the business it carries on. The directors or managers of the corporation run the affairs of the company and are responsible for making major decisions in the corporation.

The output of managerial duties such as good decision-making, improved productivity or sustained financial viability reflects the efforts the directors put in running the company’s business. 

Conclusion

This sale of the business to a healthy entity will enable the corporation to offset its debts with the money recovered from the sale whilst preserving the going concern value of the corporation. The sale will increase the likelihood of success of the business by obtaining the control of the corporation from the ineffective directors and officers as the success of every business lies in the hands those who call the shots in that business.

The sale of the business as a going concern to a third party not only benefits the business but also serves public interest as it preserves economic relationships with the employers, suppliers and other stakeholders.

However, the root of the problem lies in the management of the corporation and not in the corporations’ business. To rescue this company, the sale of the business as a going concern to pre-filing creditors or to new parties may bring the company to a healthier state especially when the new owner brings in capital, new operational expertise, new management skills and other benefits to the business. The sale of the company as a going concern would give a new opportunity to the company to succeed at the business through a new entity and management.

A company is said to be insolvent when its available assets are insufficient to satisfy claims against it on the due date. 

The insolvency law compels the debtor to choose whom to pay amongst the creditors considering that there is not enough money to go round. The law determines the process of maximization of value by deciding who gets paid out and whose debt will remain unpaid.

An important indicator of a country’s economic strength is the resilience of its businesses, as evidenced by their ability to survive insolvency, reorganize, and return to profitability. Before a rescue process is commenced, it is important to determine the viability of the company to avoid deferred liquidations.

When a viable corporation is insolvent, the going concern of the company should be preserved because the corporation is worth more to its creditors alive than dead. When a corporation is not viable, the swift sale of the assets as a going concern has the same purpose of rescuing the business to maximize value for its creditors.

Corporations need credit when the available capital is insufficient to boost the profitability and development of the business. Creditors, who believe in the objects of a corporation, invest their resources with the hope to benefit from the returns when they are due.

 To secure their loans, some creditors obtain a security interest in the assets of the corporation as collateral. Generally, the existence of secured credit should, all things being equal, increase the overall availability of credit and reduce borrowing costs across the economy. Creditors run certain risks when the company becomes insolvent and is unable to repay these loans.

In conclusion, there are certain normative attitudes that arise from the existence of a debtor creditor relationship such as an obligation to save the company during insolvency knowing that all the assets of the corporation at the time will not be able to satisfy claims against it. Insolvency law provides for a rescue option that protects the debtor and its assets by helping the debtor reorganize its business to enable it satisfy all the claims against it.

In recent times, the reason why corporations enter into insolvency has been attributed to poor corporate governance. When a corporation is insolvent the creditors incur losses and the employees of the corporation fear the loss of their jobs. Insolvency laws provides for investigation into the failure of the corporation by the liquidator and sanctions are placed on the directors and officers for their acts or omissions in relation to their fiduciary duties to the corporation.

What are the things that are likely to cause insolvency:

Cash Flow

Bad financial management and having a consistent lack of cash can be one of the biggest causes of insolvency.

Not having enough money in the bank to cover monthly expenses such as payroll and rent as well as any unexpected costs, can eventually land a business in hot water. Sales can fluctuate from month to month, and failing to have a substantial buffer to cover you during a particularly quiet period can lead to a business’s demise.

Lack of reliable financial information

Without an in-depth understanding of the financial movements of your business, it’s impossible to know how well it is doing. This is when problems creep in. Having good business and cash flow forecasts in place is crucial if you want to avoid insolvency. This will mean you have a solid understanding of where the business is heading in the future and therefore better equipped for any potential costs that come with growth and expansion.

Too much debt

Keeping on top of debt repayments is crucial to a business’s success and taking out too much debt is one of the biggest causes of insolvency. While most businesses at some point rely on taking out credit, over-borrowing can place your business in a vulnerable position.

Assuming your business will make the necessary revenue in the future is risky and borrowing money without any accurate insight into whether you will be able to pay it back may well be detrimental to your business.

Lack of budgeting

Failing to make a profit over a substantial period of time can also lead to business insolvency, and a lack of budgeting can further add to this.

Business owners that are struggling to make ends meet but fail to reduce overheads such as rent, bills, wages are likely to be steering their business further into financial difficulty. Failing to postpone luxuries and reduce excessive salaries can also have a part to play.

Is your business at risk of becoming insolvent?

If your business is facing some financial difficulties, it’s important not to make the situation any worse by continuing to over-budget or by applying for more credit.