When does the question of insolvency arise for a company?

It arises when the company repeatedly cannot settle liabilities on time, such as wages, supplier invoices or taxes. In such situations, the board and management should act promptly to assess options and responsibilities.

What is the difference between insolvency and illiquidity?

Illiquidity refers to temporary payment difficulties, while insolvency concerns a more enduring inability to pay debts when due. The key difference is whether there is a realistic prospect of short-term recovery.

Insolvency

Q: What does insolvency mean?

Insolvency means that a company or individual cannot pay debts as they fall due and that the inability is not temporary. The assessment focuses on whether payment problems are lasting rather than short-term.

We advise on insolvency matters and clarify options for action in relation to claims, liability and disputes

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Explained – what does insolvency mean?

Insolvency is a legal term describing a state in which a debtor cannot meet financial obligations and the situation is assessed as lasting. In business law, this is pivotal as it may lead to measures such as company reconstruction, bankruptcy or composition. A legal adviser to businesses often helps assess the options for managing a potential insolvency situation lawfully. The concept is regulated, among other things, in the Bankruptcy Act (1987:672) and the Company Reconstruction Act (2022:964).

When does the question of insolvency arise?

The question of insolvency arises when a company can no longer pay its debts as they fall due. This can involve unpaid wages, trade payables or taxes that can no longer be settled. In these circumstances management must act swiftly to avoid personal liability, for example for a bankruptcy petition lodged too late.

Business executives in boardroom meeting discussing insolvency and financial distress, with a red downward arrow on a graph showing company loss and declining performance.

Points to consider in corporate insolvency

There are several practical and legal steps a company should consider when signs of corporate insolvency begin to appear.

Prepare a liquidity balance sheet to clearly assess the company’s ability to pay.
Convene a board meeting to record the position and decide on necessary measures.
Engage corporate legal and accounting expertise to analyse potential solutions.
Avoid entering new contracts or debt commitments that the company cannot perform.
Consider any potential personal liability that may arise under the Companies Act in the event of capital deficiency.
Inform major creditors of the situation and explore temporary payment arrangements.

By acting early and in a structured manner, companies can minimise financial damage and create the conditions either to regain stability or to wind down operations in an orderly way.

Insolvency

Why is insolvency important?

Insolvency marks the boundary between financial imbalance and actual inability to pay. Knowing the rules enables the board of directors and management to take timely decisions, with consequences for both the company’s future and its officers personally. For lenders and suppliers, understanding corporate insolvency is central to assessing counterparties’ ability to pay.

When a company can no longer meet its financial commitments, qualified support is often required to handle the process correctly. By involving experienced advisers, one can choose a path that complies with the law and protects employees as well as owners. Matters of corporate insolvency affect the wider economy and support fair competition in which viable companies can continue to operate.

Insolvency means that a person or company cannot pay debts when due and that this inability is not merely temporary under the Bankruptcy Act (1987:672).

A company may be considered to be moving towards insolvency when it repeatedly fails to pay current liabilities and liquidity deteriorates. An early warning sign is deferring payments to suppliers or needing to renegotiate credit terms. These are typical indicators in corporate insolvency analysis.

Illiquidity refers to temporary payment difficulties, whereas insolvency concerns a more enduring financial inability. The distinction largely lies in the time horizon and the realistic prospect of financial recovery (the difference between insolvency and illiquidity).

Company reconstruction to attempt to rescue the business.
Voluntary composition to reach agreements with creditors.
Bankruptcy if the business cannot continue.
Asset sales or a merger with another company.

The board must act if the company is suspected to be insolvent. Under the Companies Act, directors may incur personal liability if they fail to take necessary measures, such as preparing a balance sheet for liquidation purposes or filing for bankruptcy in time (director liability in insolvency).

It should promptly analyse cash flow and consult legal and accounting experts. Swift action increases the chances of handling the process correctly at law and avoiding personal liability within a corporate insolvency context.