How to Check for Insolvency

insolvency 2Insolvency is described as the state by which an individual or entity can no longer meet their obligations as they become due. It is where one’s total liabilities has exceeded the total amount of assets thereby disabling the ability to pay off debts due to the lack of adequate resources. Turning insolvent is dreaded by many and for obvious reasons. It is one of if not the major cause of bankruptcies and liquidations. Today, we asked experts for the ways by which we can check and warn ourselves of a looming insolvency.

  • Dwindling Cash Flows

When cash outflows exceed inflows, insolvency is pretty much present. Even before such occurrence happens, the frequency by which the entity’s cash levels tend to dwindle and fluctuate is a sign of inconsistency and instability which are red flags on their own.

  • Increasing Interest Expenses

Why do interest expenses rise? It goes up when debts are left unpaid or when payment for them is delayed. Why would there be delayed and missed payments? For obvious reasons, there has to be some sort of financial trouble. There is no valid reason for any individual or business to miss their obligations intentionally.

  • Winding Up Threats

Missed obligations are the only reason as to why creditors will bring in winding up petitions and threats. Keep in mind that such action is costly on their part and is thus their last resource at forcing a collection. Also, winding up petitions are only applicable to insolvent entities. This of course is a major concern as such act can force the entity to liquidate even without its consent making it a compulsory procedure.

  • Top Management Resignations and Turnovers

When a ship is about to sink, who are the first to know? The crew and the captain of course. In the business setting, this pertains to the top management officers and board of directors. When one sees a lot of high ranking officials leaving the organization, this should be taken as a red flag. These individuals could be saving themselves and their source of income just in time before the company has fully sunken deep. Take notice.

  • Large and Abrupt Cost Cuts

Reducing costs is not new to businesses and even us individuals. However, when these cuts are both large and abrupt, it could mean that the entity is in dire need of extra funds or lacks adequate resources for them. In the business setting, the first to go are oftentimes expenses related to employee perks and benefits.

Valid Reasons for a Members Voluntary Liquidation

members-voluntary-liquidationA Members Voluntary Liquidation or MVL is normal and happens to many businesses and industries. As its name suggests, the procedure is characterized by a deliberate decision to legally and formally close a solvent and viable entity; that is, the company has the full capacity to fulfill all obligations in full for at least within a twelve month period.

Of course, an MVL must be brought about for valid grounds and has to be done under applicable circumstances otherwise the court won’t allow for its use. With that said, below is a list of valid reasons behind a Members Voluntary Liquidation.

  • The desire of owners for a retirement…

Because the business and its owners are considered to be different juridical entities, corporate assets cannot be transferred to personal accounts unless liquidation is first achieved. This is why owners must first go through an MVL if they wish to retire, expire the company and enjoy the fruits of their long years of labor.

  • Pulling assets for reinvestment purposes…

For the same reason as stated above, should the owners wish to reinvest their resources in a different venture then a Members Voluntary Liquidation will have to be carried out. This is under the guise that all of the current entity’s resources shall be used for such investment.

  • The absence of a suitable heir or successor…

It also becomes a viable option to voluntarily close the business should there be no willing and qualified heir or successor to take over it. This is a particularly common scenario for businesses that are family owned and run. Instead of having the company be managed by the wrong hands, owners may opt to liquidate instead and maybe even put the money elsewhere.

  • Losing a vital member to the organization…

There are cases where a particular member’s importance to the organization is so great that their loss, death, retirement or resignation can lead to its downfall. During such circumstances and as a means to be risk averse, the procedure may be called for.

  • The completion of purpose…

There are cases where upon the completion of the corporate objective and/or the expiration of purpose, the company shall have to cease to exist. After all, what’s an organization for if it no longer has a goal? Since the entity is still solvent at this time, a Members Voluntary Liquidation is one very viable option.

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