Differences between insolvency and bankruptcy
Many believe that the “insolvency” procedure is the same as the “bankruptcy” procedure. Concerning the “reorganization”, most people associate this word with the insolvency / bankruptcy, without knowing concretely which the relation between them is.
However, it should be known that although these three notions (insolvency, bankruptcy and reorganization) are related, they are not the same, but have different significations.
Meaning of these terms
- The “insolvency” procedure is that legal procedure that shall be opened upon the debtor or creditor’s request, in case a company is in insolvency. By law, the insolvency state represents that state when the patrimony of a company is characterized by the insufficiency of the available money for paying the certain, liquid and outstanding debts. .
- The “bankruptcy” procedure represent the insolvency procedure applied to debtor in order to liquidate its estate for covering the liabilities, being followed by the deregistration of the debtor from the register where it is registered.
- 3. The “reorganization” procedure is the insolvency procedure applied to debtor in order to pay its debts, according to the receivables’ payment program. The reorganization procedure implies the conclusion, approval, implementation and compliance with a plan, called reorganization plan that may provide, collectively or separately:
- Operational and/or financial reorganization of the debtor;
- Corporative reorganization by the modification of the shareholding structure;
- Activity limitation, by liquidating some assets from the debtor’s estate.
The insolvency procedure is an “umbrella” procedure that includes also the reorganization procedure and/or the bankruptcy one. Therefore, the relation between these two sub-procedures (bankruptcy and reorganization), on one side, and the insolvency procedure, on the other side, is the one of a part related to an entirety.
Thus, if a company is in insolvency, in relation to this state it shall be opened the “insolvency procedure”.
The opening of this insolvency procedure is normally followed up by a period of time (named “observation period”) when the legal administrator analyzes the legal and patrimony state of the company in order to establish if there are any real perspectives for saving the company, based on a reorganization plan, or by case, if the company should be liquidated, because it cannot be reorganized.
After finishing this analysis by the legal administrator, the company’s creditors shall decide:
- If the company will be saved, by legal reorganization, or
- If the company’s liquidation will start.
If it is approved the company’s reorganization, the insolvency procedure shall enter in a new phase, the “legal reorganization” phase. Although concerning this phase, the law uses the expression “reorganization procedure”, creating the impression that this is a distinct procedure and not the “insolvency procedure”, in fact, as we shown above, this “reorganization procedure” represents only a phase within the “insolvency procedure”.
In case it is not approved the company’s reorganization or, by case, although it is approved such reorganization, this fails, the company shall enter in the “bankruptcy” procedure.
La fel ca si in cazul “reorganizarii”, legea foloseste denumirea de “procedura” de faliment, creand impresia ca aceasta este o procedura diferita de cea de insolventa.
Similar to the “reorganization” case, the law uses the name – bankruptcy procedure, creating the impression that this procedure is different than the insolvency one.
However, the “bankruptcy” represents only a phase, possible but not compulsory, of the “insolvency procedure”.
As a result, in case the company enters the bankruptcy, we can say that this is in insolvency, but the reciprocity is not valid; if a company is in insolvency, does not necessarily mean that it is in bankruptcy; on the contrary, it is possible for such company to be in the reorganization phase and to “escape” successfully from the insolvency procedure.