Technical bankruptcy – What it is, definition and concept

Technical bankruptcy is an accounting concept that translates into negative equity, produced when the book value of a company’s payable liability is higher than the value of the assets.

That is, technical bankruptcy occurs when the company’s net worth is negative. And how is that possible? It is possible if what we owe (debts) is worth more than what we have (assets).

To confirm this, it is necessary to analyze the company’s balance sheet:

Book value of receivable liability> book value of assets => negative equity

Characteristics of a technical bankruptcy

Being in a situation of technical bankruptcy is synonymous with being in a situation of insolvency. The company can no longer meet its debts or anticipates that it will soon be unable to do so on a regular basis, using all its assets.

The company in a situation of technical bankruptcy can and should detect that it is in a state of insolvency when the following obligations are generally breached and it has several creditors:

  • Payment of tax obligations.
  • Payment of wages, compensation or any other compensation to workers: Same term.
  • Payment of Social Security contributions.

A period of non-compliance with these obligations is established before requesting bankruptcy. For example, in Spain this period is equivalent to 3 months, but depending on the country where the company is located and the legislation that applies, this may change.

However, before starting the process and requesting bankruptcy against lawyers, the company can analyze options for refinancing or restructuring the liability to redistribute the weight of the debt in different maturities or try to lower the interest rate. Taking these measures can suppose an oxygen balloon that alleviates a situation of insolvency, provisionally.

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Application process for bankruptcy

All countries have a law that regulates the bankruptcy of companies. For example, in Mexico, this law is called the Commercial Insolvency Law and, in Colombia, the Business Insolvency Law. Each one regulates the rules of this situation in their country.

In Spain this law is called the Bankruptcy Law and it dictates that companies have the legal obligation to request the bankruptcy of their lawyers to seek a solution to the debtor’s state of insolvency. This law includes a procedure through which an attempt is made to renegotiate with creditors in order to achieve the viability of the company as far as possible.

For this, the company must provide when it has no legal obligation to keep its accounting:

  • The memory of its economic and legal evolution of the last three years, identifying the causes of the current situation and proposals for the viability of its assets.
  • Inventory of the goods and rights, indicating the purchase value and the current market valuation, including charges on them, if any.
  • List of creditors, with the amount of the debts and due dates associated with each one, in addition to identifying them with their identity and address.
  • The identity of all the partners, the representative body, administrators and accounts auditor and also a list with the workforce.
  • Indicate if it belongs to a group of companies.

If the company is legally obliged to keep the accounts, it must provide:

The judge is in charge of estimating the request and, in the positive case, would issue a judicial order that would declare the bankruptcy.

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