Company insolvency: rehabilitation or liquidation
What you will learn
Explain how an accounting profit can coexist with difficulty paying on time.
A company may be insolvent if it cannot pay debts when due, or its liabilities exceed the value of its assets.
A loss-making month or falling share price alone does not prove insolvency. Accounting profit, available cash and debts due are different things. In Israeli insolvency proceedings, a court may direct operation for rehabilitation or liquidation, depending on conditions and circumstances. Rehabilitation seeks to preserve viable activity; liquidation realises assets and distributes proceeds under statutory priority rules. Creditors may recover only part of their claims. A shareholder is not a creditor merely by holding shares and may lose the entire investment; shareholder rights are residual after creditor rights. Company debt does not automatically become an owner’s personal debt, but personal guarantees and exceptions can change the outcome.
A fictional company expects payment from a customer next month but must pay a supplier today and lacks cash. A sale recorded as profit does not solve the cash shortage. More information is needed before choosing a legal or financial response.
Explain how an accounting profit can coexist with difficulty paying on time.
Ministry of Justice — official information ↗Check your understanding
A share price falls 20%. Does this prove company insolvency?
- Yes
- No; debts, assets and payment capacity must be assessed
- Only if it happens in one day
Answer and explanation
No; debts, assets and payment capacity must be assessed. Share price alone does not establish insolvency.
What is the basic distinction between rehabilitation and liquidation?
- There is none
- Rehabilitation guarantees full debt repayment
- Rehabilitation seeks viable activity; liquidation realises assets under the law
Answer and explanation
Rehabilitation seeks viable activity; liquidation realises assets under the law. Neither route guarantees full repayment to every creditor.
What can happen to shares in an insolvent company?
- The entire investment can be lost
- Shareholders are always paid before creditors
- The state always refunds the investment
Answer and explanation
The entire investment can be lost. Shareholders bear risk and their rights are residual after creditors.
Continue learning
What is a legal entity? — A legal entity is an organisation recognised by law as a separate legal person. A company is one type, but not the only type.
A Business: Sole Proprietor and a Limited Company (Ltd.) — A company is a separate legal entity; 'Ltd.' indicates limited liability of the shareholders under the law.
Issuing and trading shares: who receives the money? — Issuing new shares can raise money for a company. In trading between investors, the seller usually receives the money.