ABSTRACT
Insolvency is a situation wherein an entity is unable to pay-off its financial obligations when and as they come due (Definition of Insolvency, Merriam-Webster’s Website, 2019). Insolvency is of two types-it may be either “income insolvency” or “accounting report insolvency.” Income insolvency occurs when an entity is unable to pay off its dues when they are pending, because of a lack of liquidity (i.e., liquidity crunch). Balance sheet insolvency, on the other hand, occurs when the organization’s benefits are not exactly their and liabilities are more (Debt Organization, 2019). Further, to determine whether the insolvency is income insolvency or accounting report insolvency, although out from the ambit of this submission, one may allude to sect 123 of the Insolvency Act (1986) (BNY Corporate Trustees Services Limited and Ors Case Law, 2007).
Before we progress further with this submission, we must first understand the difference between insolvency and bankruptcy. While insolvency refers to a condition of financial misery, bankruptcy refers to the court decision that explains that how the ruined entity facing financial distress is supposed to pay off its debts and comes into the picture when all other alternative methods for the revival of the entity have failed. It is possible that an entity may be insolvent but not bankrupt at any given point in time. However, a constant state of insolvency may lead to bankruptcy. Insolvency can be understood as a step preceding bankruptcy (Financial Ruination Definition, Investopedia, 2019).
