Insolvency is a term that describes two basic situations:
- Insolvency as a situation where the debtor is unable to pay his obligations. In this situation, the liquidity (liquidity test) is a decision criterion
- Insolvency as a situation where over-indebtedness is. In this case, the value of the debtor’s assets (balance test) is the decisive criterion. Insolvency occurs when the debtor has several creditors, where liabilities exceed the value of the assets.
Use of the insolvency in practice: The effects of insolvency are dealt with in the insolvency proceedings. The proposal in this proceeding may be made by the debtor or creditor. Insolvency proceedings are judicial proceedings concerning a debtor’s bankruptcy and how to solve it.
Insolvency is a manifestation of the financial crisis of the enterprise. The causes may differ:
- Disproportional rapid growth of the enterprise with insufficient working capital
- Great investments inadequate to market conditions
- High proportion of debt in anticipation of market growth, which has not appeared
- Bankruptcy of key customers, etc.