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.