An accurate evaluation for financial security

The difference between insolvency and bankruptcy

Posted by
Marius Sabo

Due to the current challenges generated by the complicated situations that the whole world feels, such as the pandemic, the war, inflation, the very high increase in the prices of raw materials or energy, more and more companies are ending up in insolvency.

Insolvency is the situation in which a company no longer has the financial capacity to pay its certain, liquid and due debts to creditors, financial institutions, employees, suppliers or business partners. According to the legislation in force, insolvency can be made when 60 days have passed since the due date of payments to creditors.

A lot of people equate insolvency with bankruptcy, which is not right. Bankruptcy is the last stage of insolvency proceedings, in which a company arrives only if the reorganization plan fails within a period of time required by law.

Insolvency and bankruptcy are two distinct stages, which have a chronological unfolding throughout the insolvency process, namely:

1. observation period - is the period between the date of the opening of the insolvency proceedings and the date of confirmation of the reorganization plan or, as the case may be, of the bankruptcy;

2. judicial reorganization - applies to the debtor in order to pay his debts, according to the schedule of payment of claims. The reorganization procedure involves the drawing up, approval, implementation and observance of a plan, called a reorganization plan, which may provide, together or separately:

- operational and/or financial restructuring of the debtor;

- corporate restructuring by modifying the share capital structure;

- restriction of activity by liquidating some assets from the debtor's estate.

3. bankruptcy - the final stage, when either the proposed reorganization plan fails or it has been decided that it is not viable and has been passed directly to the bankruptcy stage.

Going bankrupt is the most difficult challenge for a company, because at this stage there is only the possibility of liquidating the company's assets, in order to cover the liabilities, followed by its deregistration from the Trade Register.

In bankruptcy proceedings, the valuation covers all the assets in the debtor's estate and is different from that of the assets affected by the preference clauses, which is made in order to draw up the final table.

In the bankruptcy stage, the assets of the debtor's estate will be valuated both in bulk and individually. The bulk valuation shall consider either the assessment of the totality of the assets in the debtor's estate or the assessment of functional subassemblies.

Definitely, insolvency is not a plus in the image of a company, but no situation without resolution. To avoid this situation, any entrepreneur must be circumspect, observe all financial problems in advance and find solutions to make profitable and reduce unnecessary expenses.

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