Insolvency, bankruptcy and liquidation are the three terms that people generally have a tendency to use interchangeably. But, each connotes specific meaning that creates a different impact on the concern related. Typically, all the troubles begin with insolvency, may extend to bankruptcy, which might end up in liquidation.

When the business entity fails to pay the amount due to the creditors, it is considered insolvent. Insolvency also emerges when the fair market value of the assets fall a lot lower than the liabilities revealed in the balance sheet. When a business entity is declared as insolvent, it can employ the existing cash reserves to pay off the creditors or may sell some of its assets to get over the situation. Insolvency can be caused by the external factors like the unfavorable government policies, general market condition, higher market rates, as well as internal elements like inefficient management, unsuccessful products and services, etc. Insolvency need not always result in bankruptcy. Continue reading »