The goal of insolvency support is to allow creditors to get their money back when a debtor defaults. In most cases, this is accomplished by having the debtor file for insolvency. However, this is only one of several methods to recover the debtor’s payments. Other methods include contacting the debtor and negotiating with them to come up with a plan to pay off their debts or filing for liquidation.
During the COVID-19 pandemic, businesses experienced severe cash flow issues due to a slowdown in international trade and the draconian governmental measures implemented to curb the virus’s spread. This led to a number of enterprise group insolvencies, which are characterized by the fact that they span multiple jurisdictions and often involve networks of smaller businesses that are dependent on uninterrupted liquidity flows (e.g., airlines, automobile manufacturing).
Insolvency may be the result of poor cash flow management or when a business’s assets are worth less than its liabilities. In many cases, a company that experiences an insolvency will hire a debt restructuring professional to help them work out an agreement with their creditors.
This involves negotiating with creditors to renegotiate the terms of their loans, which can reduce the monthly payment amounts. The company will typically also attempt to reduce its overhead by implementing cost reduction plans. This way, the company can continue operating and still meet its debt obligations.
If a business cannot pay its debts, it must liquidate its assets in order to pay them off. Liquidation is a process that involves selling off all of the company’s assets to repay its debts and liabilities. This can be a very messy process, so it is important that the company have the right legal counsel to help navigate through this process as smoothly as possible.
A number of countries have implemented a form of “prepackaged bankruptcy” by adopting regulations that combine the informal rehabilitation procedures with formal insolvency proceedings. In these situations, the creditor approval of a reorganization plan can be obtained through a vote that takes place prior to the commencement of the formal rehabilitation proceedings.
One of the primary objectives of insolvency law is to ensure that all parties understand and accept the proceedings. In addition, the law must provide for a high level of predictability and minimize costs. These goals are generally achieved through the use of mandatory rules and clear criteria.
One example of a mandatory rule is that the court and designated officials must have access to all information and documentation related to the debtor’s financial affairs. This is critical for performing their duties in a timely and efficient manner, and is one of the reasons why laws typically include provisions that require the keeping of books and the adherence to accounting standards. The laws also should provide judges and designated officials with sufficient discretion to handle disputes that arise during the course of proceedings, as it is impossible to anticipate all possible scenarios that could occur.