Insolvency

Question 1

Why and when does a business become insolvent?

1.
2.
3.

Answer 1

• inability to pay
• imminent inability to pay
• over- indebtedness

Question 2

Internal reasons for businesses to become insolvent

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2.
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7.
8.

Answer 2

• insufficient capital
• poor financing
• wrong financing policy, e.g. debt instead of equity
• bad investment, e.g. wrong machines
• insufficient controlling
• insifficient technological progress
• organisational mistakes
• badly trained staff
• wrong depeciation methods, e.g. too fast or too slow (=Abschreibungsmethode)

Question 3

What are external reasons for a business to become insolvent?

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6.

Answer 3

• changes in consumer behaviour
• bad “paying morale” - reveivables are not paid
• government or political measures
• recession
• more and / or fierce competition
• higher taxes

Question 4

Two outcomes of a crisis

It has to be differentiated between…
1.
2.
3.
4.

Answer 4

• business recovers
  or
• cannot be saved and has to be liquidated
• rehabilitation programme (internal effort)
• insolvency procedure (overseen by local district court)
• insolvency plan
• liquidation

Question 5

What are steps of rehabilitation programms, that try to return the business to its former capacity?

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2.

Answer 5

• analysis of the reasons for the crisis
• carrying out the necessary rehabilitation measures

Question 6

What are the rehabilitation measures?

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Answer 6

• staff measures - changes in higher ranks of management, e.g. new CEO, or chaning authorized representatives, e.g. employees with general power of attorney
• organisational measures - altering structures or procedures of company, saving on cost
• financial measures - new loans or financially potent partners/ shareholders to expand capital base
• other measures - trying to sell loss-making parts of the business

SOOF
can be combined

Question 7

What is the ultimate aim when it comes to insolvency?

Answer 7

• if possible - save company with the help of an insolvency plan
• otherwise: distribution of assets among company´s creditors, i.e. the company is liquidated

Question 8

What does Liquidation menas?

Answer 8

distributing assets of the company among the company´s creditors

Question 9

How else can a business come to an end?

1.
2.

Answer 9

• merging of two or more companies
• chaning legal form of an existing company

Question 10

What is voluntary liquidartion?

Answer 10

owner closes the company voluntarily, bc he has no one to pass the business on to
usually for medium and small-sized or family run businesses