Corporate insolvency refers to the inability of a company to repay its debts leading to cash flow insolvency of balance sheet insolvency where the creditor has given the company a specified period of time to pay its debts, but it has not been able to. In the United Kingdom, insolvency is a common term used for both corporations and individuals and is usually likened to the term bankruptcy. Unlike other countries, the United Kingdom uses the term bankruptcy to refer strictly to the state of no money in individuals alone, while the term insolvency is being reserved for corporations.
Most of the well-known systems of debt enforcement in these countries depend upon the act of seizing and selling the debtor’s property in the event that they are not able to pay them off. Debt enforcement can be done in two ways, namely the secured and the unsecured systems. In the secured systems, the creditor has got an enforceable interest in the property that the debtor owns and is given this right at the beginning of the transaction. Hence, the debtor, from the beginning, knows that in the event that they are not able to pay, then their property will be seized by the creditor and used to clear off what they owe. In unsecured systems, the creditor does not have rights over the debtor’s property at the beginning of the transaction. Legal action is thus required to determine the outcome of these types of cases.
In relation to the control of assets in the event of insolvency, the use of fixed charges and floating charges are greatly employed. The floating charges allow for the secured party to obtain a blanket security interest that covers all of the debtor’s assets but allows for the free use of those assets prior to default. Hence, the person issuing the credit to such a debtor on a floating charge has got exclusive rights to ownership of all the assets that the debtor owns but allows the debtor to freely use them until he defaults in his payments to the creditor; a case that allows the creditor to seize these assets to recover his money.
In the event of default, the secured party also gains the power to appoint a private receiver to operate and then sell the assets for the benefit of the secured party though under the legal doctrine that seeks to insulate the secured party from liability for any misstep by the receiver. This allows for a system that operates largely outside the insolvency laws and away from the supervision of courts within the country.