"An expenditure of words without income of ideas will lead to intellectual bankruptcy."
- Ravi Zacharias (1946 - 2020), author and religious leader

Insolvency refers to the situation where a person or a business is unable to meet their bill and other debt obligations. The debts (liabilities) of the individual or organization exceed their assets. The situation, if not managed effectively, can result in legal action being taken against the insolvent individual or business, with assets being liquidated (seized and sold) to pay off as much of the outstanding debts as possible.

Situations that can cause insolvency include:

• A cash flow crisis caused by overspending (cash outflows) or debtors (trade customers) who are late paying.

• Loss of customers who have switched to a competitor's good or service due to changing needs and market trends.

• Loss of an important supplier that accounts for significant cost savings.

• Financial mismanagement.

• Global and local supply chain issues that prevent the business from being able to trade.

It is usually illegal for a firm to continue trading as an insolvent entity. A common solution to insolvency is declaring bankruptcy.

Bankruptcy (sometimes referred to receivership or corporate liquidation) means a situation when a person or business declares that they can no longer pay back their debts, so the entity collapses (fails). Once the person or firm's assets are liquidated to pay off some of the debts, an independent organization takes charge of legal proceedings to administer the bankruptcy, including contacting their trade creditors and financiers, as well as investigating the affairs of the individual or organization. Once a business is officially declared as bankrupt, its creditors can no longer demand payments from the business, charge it interest on outstanding debts, or take further legal action against the organization. Any outstanding debts can then be written off.

The difference between insolvency and bankruptcy is that the former describes a state of financial distress whereas the latter refers to a legal declaration and legal processes culminating in a conclusion. Not all insolvencies will lead to bankruptcies.

The COVID-19 pandemic caused many businesses to go bankrupt

In the case of limited liability companies, if a company goes into bankruptcy and owes money to individuals, commercial banks, and other creditors, the shareholders of the company do not have to pay any of those debts (as they have limited liability). The liability of shareholders is simply limited to their investment in the company. However, the shareholders are the last party to receive any funds from the sale of the firm's assets once and if all debts have been paid first.

Table 1 - Differences between insolvency and bankruptcy

 Video Review

Watch this video documentary about the history, success, and eventual bankruptcy of Kodak as the company, founded in 1892, failed to maintain its market presence in the photography industry. There are accompanying questions below for you to answer as you watch the video.

Questions

1. Founded in 1892, in which year did Kodak file for bankruptcy? 2012

2. What year did George Eastman envision a simple, easy to use camera? 1877

3. How old was George Eastman when he opened his first factory? 26 years old

4. What was the name of the revolutionary product that Eastman made, 8 years after opening his factory? Kodak

5. During World War I, what did the Kodak Company develop in attempts to aid the war? Aerial photographing technology

6. Who was the longtime collaborator of George Eastman? Henry A. Strong

7. After World War II, what demographic did Kodak relocate its entire focus on? Average consumers (mass market)

8. What is the name of the astronaut who first recorded space travel through video? John Glenn

9. Shortly after the 1965 World's Fair, Kodak had surpassed what number of employees? 100,000

10. What was the value of Kodak's sales revenue after its large presence at the 1965 World's Fair? Over $4 billion

11. Which Japanese firm was seen as a high status competitor to Kodak in the 1990s? Fujifilm

12. Kodak's sales revenue peaked at which figure? $16.3 billion

13. How many digital cameras were sold in 2007? 28 million

14. What factor played a significant role in the reduction of Kodak sales? Advancements in smartphone technologies

15. What was the date of Kodak's filing for bankruptcy? January 19th 2012

16. How much was the bankruptcy filing, made with Citigroup, worth? $950 million

17. After its bankruptcy, what type of product did Kodak fully focus on? Printing devices

18. How much profit did Kodak generate in the 2019 fiscal year? $116 million

19. What decade did Kodak develop its first digital camera? 1970s

20. What went wrong for the Kodak, in terms of its failure to keep to George Eastman's claim that the company would always be on the cutting edge of technology? Whilst true for over a century, the company lost sight of Kodak's original innovation mindset and became blind to the revolutionary digital age (of digital cameras and smartphones)

 Teacher only box

Answers

Timings have been included for teachers' reference

1. 1:06 Founded in 1892, in which year did Kodak file for bankruptcy? 2012

2. 1:27 What year did George Eastman envision a simple, easy to use camera? 1877

3. 2:00 How old was George Eastman when he opened his first factory? 26 years old

4. 2:22 What was the name of the revolutionary product that Eastman made, 8 years after opening his factory? Kodak

5. 2:53 During World War I, what did the Kodak Company develop in attempts to aid the war? Aerial photographing technology

6. 3:04 Who was the longtime collaborator of George Eastman? Henry A. Strong

7. 4:22 After World War II, what demographic did Kodak relocate its entire focus on? Average consumers (mass market)

8. 4:40 What is the name of the astronaut who first recorded space travel through video? John Glenn

9. 4:56 Shortly after the 1965 World's Fair, Kodak had surpassed what number of employees? 100,000

10. 5:03 What was the value of Kodak's sales revenue after its large presence at the 1965 World's Fair? Over $4 billion

11. 5:56 Which Japanese firm was seen as a high status competitor to Kodak in the 1990s? Fujifilm

12. 7:07 Kodak's sales revenue peaked at which figure? $16.3 billion

13. 9:22 How many digital cameras were sold in 2007? 28 million

14. 10:26 What factor played a significant role in the reduction of Kodak sales? Advancements in smartphone technologies

15. 11:51 What was the date of Kodak's filing for bankruptcy? January 19th 2012

16. 12:06 How much was the bankruptcy filing, made with Citigroup, worth? $950 million

17. 12:46 After its bankruptcy, what type of product did Kodak fully focus on? Printing devices

18. 13:46 How much profit did Kodak generate in the 2019 fiscal year? $116 million

19. 14:50 What decade did Kodak develop its first digital camera? 1970s

20. 16:50 What went wrong for the Kodak, in terms of its failure to keep to George Eastman's claim that the company would always be on the cutting edge of technology? Whilst true for over a century, the company lost sight of Kodak's original innovation mindset and became blind to the revolutionary digital age (of digital cameras and smartphones)

 Case Study - Lego

Lego was founded in 1932 and up to 1998 had never experienced a loss. However, by 2003 the privately held company had debts of $800m. Read this case study from The Guardian to find out how the Danish company turned a loss into profit and to overtake Ferrari the world’s most powerful brand at the time. There are accompanying questions for you to answer as you read the article.

Questions

1. Since its founding in 1932, what had Lego never experienced for 66 years?

2. Consultants suggested to Lego to look to which American toy manufacturer to diversify Lego's product portfolio of (just) toy bricks?

3. How much did Lego's theme parks costing to build?

4. How much did Lego's theme parks earn during their first year?

5. Despite not having an experience, what type of business did Lego build from scratch?

6. In which year did the Lego Group overtake Ferrari to become the world's most powerful brand?

7. What happened to Lego's profits between 2008 - 2010?

8. Which organization voted Lego as the toy of the century?

9. Which year was the Lego Movie released?

10. Which movie did better at the box office - The Lego Batman Movie or Batman v Superman: Dawn of Justice?

11. How many bricks are made at Lego’s production plant in Billund every day?

12. Legoland theme parks in the UK are owned by which company?

13. Winners of Lego Ideas submissions, a crowdsourcing competition, receive what percentage of their product's net sales?

14. In 2011, what percentage of Lego's customer base was made up of boys/males?

15. How many years of research did Lego Friends take?

16. What did the family of the Lego Group invest into in 1946, despite advice against it?

17. When was Lego's "System" created (allow every brick to connect and everything being backwards compatible)?

18. A mathematician recently deduced that just six eight-stud bricks of the same color could be combined in how many different ways?

19. What is the connecting power of Lego referred to as?

20. What is Lego Life?

 Teacher only box

Answers

1. Since its founding in 1932, what had Lego never experienced for 66 years? A loss

2. Consultants suggested to Lego to look to which American toy manufacturer to diversify Lego's product portfolio of (just) toy bricks? Mattel

3. How much did Lego's theme parks costing to build? £125m ($155m)

4. How much did Lego's theme parks earn during their first year? A loss of £25m ($33m)

5. Despite not having an experience, what type of business did Lego build from scratch? It built its own video games company

6. In which year did the Lego Group overtake Ferrari to become the world's most powerful brand? 2015

7. What happened to Lego's profits between 2008 - 2010? They quadrupled

8. Which organization voted Lego as the toy of the century? The British Toy Retailers Association

9. Which year was the Lego Movie released? 2014

10. Which movie did better at the box office - The Lego Batman Movie or Batman v Superman: Dawn of Justice? The Lego Batman Movie

11. How many bricks are made at Lego’s production plant in Billund every day? 120m bricks a day!

12. Legoland theme parks in the UK are owned by which company? Merlin Entertainments

13. Winners of Lego Ideas submissions, a crowdsourcing competition, receive what percentage of their product's net sales? 1%

14. In 2011, what percentage of Lego's customer base was made up of boys/males? 90%

15. How many years of research did Lego Friends take? Four years

16. What did the family of the Lego Group invest into in 1946, despite advice against it? Plastic-injection moulding machine

17. When was Lego's "System" created (allow every brick to connect and everything being backwards compatible)? 1958

18. A mathematician recently deduced that just six eight-stud bricks of the same color could be combined in how many different ways? 915,103,765

19. What is the connecting power of Lego referred to as? Clutch Power

20. What is Lego Life? Social network for kids too young for Instagram to share their creations

• Bankruptcy (also known as receivership or liquidation) refers to the situation when a person or business declares that they can no longer pay back their debts, so the entity collapses (fails).

• Insolvency refers to the situation where a person or a business is unable to meet their bill and other debt obligations.

• Voluntary administration is an alternative to liquidation and involves a third party takings full control of the business with the intention of rescuing it.

To test your understanding of the differences between insolvency and bankruptcy, have a go at this true or false quiz.