Voluntary insolvency is when a company files for debt restructuring instead of being forced into bankruptcy. It involves a formal settlement with creditors overseen by a mediator, and may involve the liquidation of assets. Creditors may have priority, and repayment terms are often extended. If the company cannot fulfill its obligations, it may eventually liquidate remaining assets.
Willful insolvency occurs when a business determines that it is unable to meet all payment requirements to its creditors. Instead of being forced into bankruptcy, the company’s officers or shareholders decide to file for a debt restructuring application for the organization. An insolvency settlement may involve the voluntary liquidation of some assets in order to satisfy creditors.
In essence, a voluntary insolvency is equivalent to a bankruptcy. Typically, the company has financial obligations that exceed its revenues and cannot successfully meet its obligations unless payment terms are restructured. It is somewhat similar to when an individual participates in a consumer credit counseling program. These programs usually reduce monthly payment amounts and interest rates on unsecured debt. In the case of a company, however, the restructuring may involve the dissolution of corporate pension plans, a reduction in executive salaries and the consolidation of corporate operations.
When a company files for voluntary insolvency, a formal settlement is reached between the company and its creditors. It is usually overseen by a court-appointed judge or arbitrator who mediates between the parties involved. Typically the company has funds available to pay its creditors, but does not have enough to pay all obligations in full on time. As part of a voluntary insolvency settlement, a company will need to find a way to reduce its expenses so as to avoid permanent insolvency and return to a viable state.
Some creditors may have priority over others in the event of voluntary insolvency. For example, those who are owed payments on interest secured as property or equipment may be entitled to the repossession or sale proceeds. Some shareholders of the company, such as holders of preferred stock or employees who have funds invested in profit-sharing plans, may receive payments from liquidation proceeds earlier than investors who hold common stock.
Under a voluntary insolvency agreement, the terms for repaying creditors are often extended. The company is given a certain amount of time to recover from bankruptcy and repay the restructured debt. The amount that is due by a certain date can be reduced or can be paid by streamlining the company’s operations. An agreement will typically outline the short- and long-term steps the company plans to take to ensure that its revenues exceed its liabilities.
If a company is unable to successfully fulfill its obligations under the restructuring plan, it may eventually wind up and liquidate the remaining assets. While the voluntary insolvency agreement protects the company from immediate repossession of property by creditors, it does not forgive property debts. In the event of a complete business bankruptcy, creditors will receive all payments from the full liquidation proceedings on a priority basis.
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