In finance, the term insolvency refers to a condition in which an entity is unable to meet its debt obligations. Insolvency occurs when the financial inflows to a person, company or other entity are consistently lower than their financial outflows, making repayment of debt impossible over the long term. Insolvency typically leads to bankruptcy.
Example of insolvency:
A restaurant has contracts with supplier which require it to pay 10,000 Swiss francs per month for goods and services provided. It also has contracts with 5 employees which requires it to pay salaries totaling 15,000 francs per month, and a rental contract for its premises which requires it to pay 4000 francs per month in rent. Its combined fixed monthly expenses total 29,000 francs per month.
If the restaurant failed to generate enough income to cover its 29,000-franc overhead, it would have to find another source of financing to make up the deficit (savings, investment or a loan, for example). If it was not able to find a way to fund its deficit and therefore could not meet its financial commitments, it would become insolvent.
Its creditors would be able to file debt claims against the insolvent restaurant, which would have to either negotiate a debt repayment plan or file for bankruptcy.
In Switzerland, insolvent companies can apply for an insolvency certificate by presenting proof to the court responsible for their municipality of registration. Insolvency must be proven by the provision of financial statements and profit and loss statements. A bankruptcy judge reviews the case and, if the insolvency is genuine, declares the company bankrupt. Bankruptcy proceedings are then handled by the relevant bankruptcy office.
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