Insolvency Law Cash Flow and Balance Sheet Essay

Excerpt from Essay :

Insolvency Law

Cash flow and balance sheet tests

The cash flow test very simply put is the ability of a company to pay off their debts as they are liable to pay them; i.e. As soon as they are indebted they already have generated the money to pay it off immediately. A company will prove to be insolvent if and when the futuristic calculations prove it to be incapable of paying their debts. In case, a company is able to pay off their debts or bills for the first two months and after those, it is still considered insolvent. Hence, the cash flow insolvency test will be a futuristic calculation of debts and cash inflows based on the current trends of both e.g. If a company is earning $100,000 and has debts of $50,000 going out every month, the debts will increase to $60,000 in a month's time making the company insolvent (Arner et al., 2006).

The balance sheet test is somewhat similar to the cash flow test but instead of calculating futuristic cash inflows, it focuses on probabilities of increase or decrease in liabilities and cash flows. Hence, the entire balance sheet test is based on the perspective inflows and outflows of a company. If and when the difference between the cash inflows and cash outflows is negative, then the company is considered to be insolvent. It is important to note here that only a handful of companies will measure up to being solvent after the balance sheet insolvency tests are complete (Arner et al., 2006).

Between the cash flow and balance sheet test, the cash flow test is a lot more accurate to measure a company's insolvency as it considers the tangible inflows and outflows to determine a company's financial standing i.e. The cash flows that the company is already recording and will continue to record in the future as well. The balance sheet test on the other hand considers the perspective cash flows, i.e. those cash flows that might possibly occur in the future, which leaves a sense of unpredictability to the company's financial strength. Hence, the cash flow test is better and much more accurate.

Question #2: Hong Kong and Corporate Insolvency

The three ways in which the Hong Kong Insolvency Approach differs from the formal corporate insolvency procedures include: first, the liquidation of a company is referred to as 'winding up'. Furthermore, this winding up may be a result of voluntary actions i.e. without the court order and/or a compulsory winding up where the court decision comes into play. The Hong Kong approach also does not have an efficient system where the insolvent companies can be restructured through negotiations with the changing times. Another major difference between the Hong Kong approach and the formal corporate insolvency procedures is that it does not provide much opportunity or incentive to the creditors and/or debtors when insolvency or bankruptcy takes place.

Question #3: Handmade Furniture

When deicing the future for Handmade Furniture within the Bahamian and Hong Kong insolvency laws, we have to consider both the possibilities of winding up the company as well as restructuring it. Considering the insolvency laws within Honk Kong, the restructuring of the company could prove to be a futile effort as the history of support shown from the government to the creditors and the debtors within Hong Kong has not been a good or a consistent one. So, the choice of restructuring for HF within Hong Kong could prove to be a very tricky choice. On the other hand, the winding up or liquidation of the company within Hong Kong may prove to be smart considering that it may also solve the law suit within the region.

However, on the other hand, considering the mortgage that they have on the property, it would be wiser to take a chance and restructure the company; the mortgage will be difficult to pay off after winding up especially considering that the assets of the company might all be infected material with the exception of the premises. Also, the international suits and financial pressures could be shared if and when the restructuring process takes place as it will give the company breathing room to plan an appropriate reaction to the financial and legal crisis that it is facing. Furthermore, a restructure will also help the company attain a legally binding stature in the state which will prove fruitful in the future. The PL will need to act fast though on creating a positive repertoire for the company amongst prospective creditors so that the reputation of a failing and falling business does not precede the negotiation process and there is a semblance of profit-making incentive for the creditors. This could be done by the PL by focusing primarily on the quality of the products and the distribution network of the company prior to the termites hit. This will be extremely important as it will show a promise to the creditors for possible growth once the current termite problem and law suits are sorted out. The PL will also have to make sure that there is a balance to the control given to the creditors and the company executives so that the current administration will be willing to continue to work on within the company structure. This is extremely important because the current administration was the key for HF's success before they were blindsided by the termite problem. Of course, the integral task for the PL will be to ensure that if the restructuring does in fact take place, he gets a strong incentive package from the Hong Kong courts and government as that will prematurely decide the fate of the company in the short and long run.

Overall, when talking about insolvency conditions outside the region of Hong Kong, it might turn out to be feasible for the company to be restructured. This will help the company negotiate a deal that might help them turn their liabilities into profits in the long run. It might also help them take care of the law suits and the termite problem as new investors or creditors will bring in revenue to help them pay off their debts and invest intelligently in the counteract needed to get the company back to a profitable running statmeonyee.

Question #4: Secured transaction laws

I agree to the statement that "Secured transactions law is completely distinct from insolvency law; secured creditors' collateral should not be considered part of an insolvent company's estate." Firstly, the important thing to note is that the secured transaction laws are primarily the laws in place to prevent and insolvency case to occur for the creditors. They are formed to ensure that the creditors attain the maximum opportunities to get back their debts before a company becomes insolvent. Hence, the law clearly offers security to the creditors so that they don't have to worry about their finances going down the drain. Similarly, it provides a security for the creditor against any and all collateral investment in case the company does become insolvent. This protection is part of the creditor's rights to prevent any collateral damage to the creditor in case the company does turn insolvent. In case of liquidation, all the property set forth as collateral will have to be given back to the secured creditor and it will now be included as part of the liquidation assets available to the company to pay off the debts. This is the case within the United States as well as the United Kingdom. Also, since a majority of the laws adopted by the Asian laws include the UK stratagems and principles, we can see a similar stance being taken across Indonesia, Malaysia and Hong Kong as well. In fact, the U.S. also does not allow the company to liquidate any of the creditor's collateral without the secured creditor's consent and knowledge.

In case of the formal restructuring of a company, the collateral is not part of the company's assets and must be returned to the original lender or creditor for re-use. Also, it is only with the consent of the creditors that the company can use the collateral material offered by the creditors as part of the restructuring process. If the creditors are not willing to further contribute their collateral material in the restructuring process, they have every right to take back what they lent and the company cannot legally force them not to.

Moreover, in the out-of-court or voluntary restructuring regimes, if and when the voluntary restructuring is called by the creditors and they are informed of the company's performance by the directors in a formal meeting. This is where the decision to move forward with the restructuring is done and the creditors decide whether or not they want to continue on in the restricting process. At times, the creditors will pull out some of their collateral and invest other which is merely done to see how the restricting shapes up. The out of court restructuring is usually the preferred…

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