What is insolvency?
25th April 2014
Insolvency:
\In*sol”ven*cy\, n.; pl. Insolvencies. (Law)
(a) The condition of being insolvent; the state or condition of a person who is insolvent; the condition of one who is unable to pay his debts as they fall due, or in the usual course of trade and business; as, a merchant’s insolvency.
(b) Insufficiency to discharge all debts of the owner; as, the insolvency of an estate.
(c) Relating to persons unable to pay their debts.
The oldest record of insolvency can be found in the Bible:
DEUTERONOMY 15: 1-2
“At the end of every seven years you are to cancel the debts of those who owe you money. This is how it is done. Everyone who has lent money to his neighbour is to cancel the debt: he must not try to collect the money: the Lord himself has declared the debt cancelled.”
Brief History of Insolvency
In ancient times, an insolvent debtor was subject to very harsh treatment. As trade and commerce developed, steps were taken to ease these severe treatments.
In Ancient Rome, creditors had the right to enslave the debtor as well as his family. In seventeenth century, during golden days of British Empire, a debtor who could not give genuine clarification for unsolved debt had to bear public humiliation.
In the Victorian era, and even up until the late 50’s, it was not unusual for an individual who could not pay his or her debts to spend a period of time in debtor’s prison.
The original purpose of a bankruptcy was a solution to insolvency, and not a method of avoiding debt. The aim was to liquidate all assets of an individual’s estate (large or small) in order to pay creditors as much of what was owed as possible. The creditors would accept a portion of what was owed, as it was clearly all that the debtor possessed.
The aim of bankruptcy in the literal sense remains the same, although there are now many more options open to individuals finding themselves, or their business, insolvent (or close to it).
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.