Insolvency means a particular state of financial condition when liabilities exceed assets. It is applicable to both individuals as well as business entities. From a legal perspective, insolvency is different from bankruptcy. In the United Kingdom, the term bankruptcy is reserved for individuals whereas a company which is insolvent may be put into liquidation for eventual winding-up.
Both the United States and United Kingdom have insolvency regimes with objectives to safeguard the creditors of the insolvent individual or company and balance their respective interests. In US, under the Uniform Commercial Code, a person is considered "insolvent" when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts which has become due, or is insolvent as defined by the Bankruptcy Code.
The United Nations Commission on International Trade Law (UNICITRAL) has incorporated a Model Law on Insolvency which is generally followed in cases of Cross-Border Insolvency. The Model Law was approved and adopted by the Commission in May 1997 and endorsed by the United Nations General Assembly in December 1997.
The Model Law is now in force in Japan, Mexico, Poland, Romania, South Africa, the United States, British Virgin Islands, Serbia and Montenegro. Countries like Australia, India, New Zealand and the United Kingdom are actively considering the enactment of legislation on such lines.
The Indian Acts relating to insolvency are based on the English statutes. In India, an insolvent is one who is unable to pay his debts. However, no man can be called an insolvent unless a competent court declares him to be so.
The main objectives of Insolvency Law are:
to provide relief to the debtor who is unable to pay his debts
to protect him from harassment by the creditor
to prevent the creditor from taking possession of the assets of the insolvent by any means