How Corporate Debts Are Resolved

Introduction

Corporate debts refer to the money, goods, and services that a company owes to others. Generally speaking, corporations must finally repay all their debts when the company becomes insolvent. Achieving solvency is the key objective of a corporation’s management and boards of directors. Corporations can achieve solvency by increasing revenues while at the same time decreasing expenses to generate positive net income.

Below is how corporate debts are resolved;

1) Debtors’ voluntary resolution

A corporation can voluntarily resolve its debts. A company that decides to voluntarily resolve its debt is called a debtor in bankruptcy. Many companies, especially small and medium-sized enterprises (SMEs), choose to resolve their debts through voluntary bankruptcy proceedings in the hope of avoiding involuntary bankruptcy.

2) Liquidation of the debtor

In certain cases, the debtor’s assets may be enough to fund those liabilities and hand them over to those creditors with claims on the company’s assets. However, most debtors (companies) find it challenging to achieve solvency through voluntary debt resolution.

3) Bankruptcy of the debtor

A company can also be ordered to resolve its debts as a result of creditors’ objections. However, solvent companies rarely face such an order. If a company is unable to pay its corporate debts, creditors can file a petition in bankruptcy court to have the company liquidated. This is called an involuntary bankruptcy procedure. An involuntary bankruptcy order is usually made if the debtor does not voluntarily resolve its debts.

4) Creditors’ voluntary liquidation

Creditors can, of their own volition, be liquidated as well. If a company in which creditors hold large stakes, such as the creditor banks in a company’s leveraged buyout, is unable to pay its debts, the creditors can petition to have the assets of the corporation sold off and distributed to them on a pro-rata basis.

Conclusion

The methods by which corporate debts are resolved are determined by the law. In many cases, there is more than one way to pay off a debt. Therefore, a company should know how corporate debts are resolved in case a debtor’s resolution is not voluntary or involuntary.