LECTURE 1 – INTRODUCTION TO INTERNATIONAL INSOLVENCY LAW
INTRODUCTION
Aspects of insolvency
Financial – unable to pay your rent etc.
Psychological – possibly being sued for not paying your dues.
Economical – businesses go bankrupt which influences the financial positions creditors.
Legal – when insolvency is turned to the courts
Two types of insolvency:
1. Don’t have the money, you can’t pay – liquidity issue.
2. Assets don’t have enough value to cover your liabilities – solvency issue.
What is insolvency?
Its either a solvency or liquidity issue.
- Solvency when assets>liabilities.
- Liquidity: the ability to pay the debts when they’re due.
UNCITRAL
European Insolvency Regulation 1346/2000(EIR2000)
European Insolvency Regulation (recast) 2015/848 (EIR 2015)
Types of reorganization
a. Formal reorganizations and insolvency (through courts etc.):
- Liquidation
Piecemeal
(Partial) going concern sale
- Reorganization
Also ‘restructuring’.
b. Informal reorganizations – takes place outside the statutory framework (in the shadow of the law).
- Business restructuring
- Financial restructuring
FROM FINANCIAL DISTRESS TO INSOLVENCY
Financing the company
Sources of finance:
- Equity: risk-bearing funds. More risk-bearing, because you don’t know if and when you will get your
money back. It is highly volatile as it’s completely dependent on how well the company does on a
daily basis, however it is possible to earn more than by lending out money (debt).
- Debt: a bit less risk-bearing funds. Less risk-bearing, because the debtor is repaid as long as the
creditor has enough funds.
From an insolvency perspective, the equity providers (shareholders) are the last to receive anything
during insolvency procedures. This means that oftentimes they don’t receive anything. The order of
who receives what during an insolvency procedure is determined by the structure of the debt.
Therefore, one should ask: ‘what type of debt is it?’:
a. Unsecured debt – competing with the other creditors.
b. Secured debt – debt can also be repaid through the proceeds of certain property or assets which
have been used as collateral.
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, Monitoring financial health
a. Yield – what are the results: profit-making entity or loss-generating entity? This is more relevant to
equity-providers than to debt-providers.
b. Solvability – the value of the assets of a company vs. the liabilities of a company. The assets are
everything that have value of a company (real estate, equipment, stock etc.), they tell you what the
value of the company is. The liabilities are everything which the company owes to other people (trade
creditors, mortgage providers, employees, whoever has a claim against the company). The equity is
on the right-hand side of the balance sheet: if it’s positive assets>liabilities, if it’s negative
assets<liabilities (= no solvability).
c. Liquidity – what you can immediately convert into cash to use to pay your debts. As long as you have
enough liquidity, you are solvent.
In insolvency law, we focus on ‘b’ and ‘c’ of companies.
Annual accounts
The financial statements provide the financial positions of companies:
a. Profit and loss statement (‘movie’)
Financial development over a specific period – usually a financial year.
b. Balance sheet (‘picture’)
A moment of the financial position of a company.
Solvency and Insolvency
The equity signals the level of health of a company, e.g. 40/550 is less than 10%, therefore the company
is not that healthy. If the company has a negative equity, it has a solvency problem (it is insolvent).
However, if the cash-position is still healthy, there will be no threat to the creditors as of yet. Therefore,
nothing will change in reality. In other words, there is a difference between the solvability and liquidity of
a company.
- Solvency = assets > liabilities.
- Insolvency = liabilities> assets.
- Liquidity = ability to pay debts when they fall due.
- Illiquidity = inability to pay debts when they fall due.
Bankruptcy
Insolvency may result in bankruptcy. In essence it is a
situation where there is a lack of cash. Currently, the
COVID-pandemic has caused many companies to have
little to no income, though the outflows have
continued. However, even without a situation like
caused by COVID, bankruptcies are a given and
cannot be prevented. This is due to the business
lifecycle (see graph).
The graph shows a general lifecycle of a company/
industry.
Over time, the development of a healthy company
will result in bankruptcy. The scope for action (what
options are there to prevent bankruptcy) changes
during this cycle. Healthy companies,
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INTRODUCTION
Aspects of insolvency
Financial – unable to pay your rent etc.
Psychological – possibly being sued for not paying your dues.
Economical – businesses go bankrupt which influences the financial positions creditors.
Legal – when insolvency is turned to the courts
Two types of insolvency:
1. Don’t have the money, you can’t pay – liquidity issue.
2. Assets don’t have enough value to cover your liabilities – solvency issue.
What is insolvency?
Its either a solvency or liquidity issue.
- Solvency when assets>liabilities.
- Liquidity: the ability to pay the debts when they’re due.
UNCITRAL
European Insolvency Regulation 1346/2000(EIR2000)
European Insolvency Regulation (recast) 2015/848 (EIR 2015)
Types of reorganization
a. Formal reorganizations and insolvency (through courts etc.):
- Liquidation
Piecemeal
(Partial) going concern sale
- Reorganization
Also ‘restructuring’.
b. Informal reorganizations – takes place outside the statutory framework (in the shadow of the law).
- Business restructuring
- Financial restructuring
FROM FINANCIAL DISTRESS TO INSOLVENCY
Financing the company
Sources of finance:
- Equity: risk-bearing funds. More risk-bearing, because you don’t know if and when you will get your
money back. It is highly volatile as it’s completely dependent on how well the company does on a
daily basis, however it is possible to earn more than by lending out money (debt).
- Debt: a bit less risk-bearing funds. Less risk-bearing, because the debtor is repaid as long as the
creditor has enough funds.
From an insolvency perspective, the equity providers (shareholders) are the last to receive anything
during insolvency procedures. This means that oftentimes they don’t receive anything. The order of
who receives what during an insolvency procedure is determined by the structure of the debt.
Therefore, one should ask: ‘what type of debt is it?’:
a. Unsecured debt – competing with the other creditors.
b. Secured debt – debt can also be repaid through the proceeds of certain property or assets which
have been used as collateral.
1
, Monitoring financial health
a. Yield – what are the results: profit-making entity or loss-generating entity? This is more relevant to
equity-providers than to debt-providers.
b. Solvability – the value of the assets of a company vs. the liabilities of a company. The assets are
everything that have value of a company (real estate, equipment, stock etc.), they tell you what the
value of the company is. The liabilities are everything which the company owes to other people (trade
creditors, mortgage providers, employees, whoever has a claim against the company). The equity is
on the right-hand side of the balance sheet: if it’s positive assets>liabilities, if it’s negative
assets<liabilities (= no solvability).
c. Liquidity – what you can immediately convert into cash to use to pay your debts. As long as you have
enough liquidity, you are solvent.
In insolvency law, we focus on ‘b’ and ‘c’ of companies.
Annual accounts
The financial statements provide the financial positions of companies:
a. Profit and loss statement (‘movie’)
Financial development over a specific period – usually a financial year.
b. Balance sheet (‘picture’)
A moment of the financial position of a company.
Solvency and Insolvency
The equity signals the level of health of a company, e.g. 40/550 is less than 10%, therefore the company
is not that healthy. If the company has a negative equity, it has a solvency problem (it is insolvent).
However, if the cash-position is still healthy, there will be no threat to the creditors as of yet. Therefore,
nothing will change in reality. In other words, there is a difference between the solvability and liquidity of
a company.
- Solvency = assets > liabilities.
- Insolvency = liabilities> assets.
- Liquidity = ability to pay debts when they fall due.
- Illiquidity = inability to pay debts when they fall due.
Bankruptcy
Insolvency may result in bankruptcy. In essence it is a
situation where there is a lack of cash. Currently, the
COVID-pandemic has caused many companies to have
little to no income, though the outflows have
continued. However, even without a situation like
caused by COVID, bankruptcies are a given and
cannot be prevented. This is due to the business
lifecycle (see graph).
The graph shows a general lifecycle of a company/
industry.
Over time, the development of a healthy company
will result in bankruptcy. The scope for action (what
options are there to prevent bankruptcy) changes
during this cycle. Healthy companies,
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