INSOLVENCY ACCOUNTS 1. Insolvency described.—Up to this time only the accounting practice of solvent business organizations has been considered. It now remains to consider the status of insolvency. A concern may be forced into insolvency when its liquid assets are not sufficient in amount to meet its current liabilities as they mature. This frequently occurs because an undertaking per mits too much of its capital to be invested in fixed assets. There may be an excess of assets over lia bilities but the current assets may not be sufficient in amount or may not be sufficiently liquid to enable the proprietor to satisfy his maturing liabilities. A busi ness may also suffer losses which will reduce its as sets to a sum less than the amount of its liabilities, in which case it will be insolvent even tho the under taking has all its assets in liquid form.
2. Voluntary and involuntary the proprietor realizes clearly that the business is in solvent, either because of his inability to pay his cur rent liabilities out of the current assets, or because the assets, even tho current, are less than the liabilities, he may apply to a court Of competent jurisdiction for the appointment of a person to take charge of the business and realize all that he can for the benefit of the creditors. This proceeding is a voluntary one; the person selected to manage the business or to whom the assets are turned over, is known as the assignee. Where the action against the debtor is taken by credi tors who apply to a court for the appointment of a person to take charge of the business, the proceed ings are said to be involuntary and the representative of the court who assumes charge is known as the receiver.
3. The duties of the receiver.—The assignee or the receiver is an officer of the court and is also a repre sentative of the creditors; it is his duty to collect the assets; to take charge of the liquidation, if such drastic measures are adopted by the creditors, realizing what he can for the benefit of the creditors and paying the excess, if any, to the proprietor.
It is not to be inferred that liquidation follows in all cases; the creditors may permit the assignee or the receiver to manage the undertaking for a period of time sufficiently long to rehabilitate the business. The control of the property will then revert to its owners.
The receiver, upon his appointment, usually em ploys a competent accountant to make an inves%iga tion of the concern's affairs and to render a report to him, showing the actual assets and liabilities of the business. He will then have the assets valued by competent appraisers: After the appraisal and after the creditors have presented their claims, the receiver will be in a position to know just what he may ex pect to realize from the assets at forced sale and to what extent the various creditors of the firm will be satisfied. The creditors, upon the receipt of this statement, may then decide whether or not to extend further accommodation or permit the business to be disposed of.
4. Status of are four general classes of creditors; first, those holding preferred claims which, by virtue of provisions of the stat utes, have a general lien on all the assets. They must be paid before any other creditors are paid; these claims are ordinarily for taxes and labor liens. In a recently decided case the Court of Appeals of the State of New York held that the unpaid salary of a bookkeeper was a preferred claim which the indi vidual stockholders of a company are responsible for, and if only one stockholder is able to pay he shall liquidate the debt. The second class of creditors is known as fully secured creditors, so-called, because the individuals have security for the full amount of their claims. They will realize on the security at the best price obtainable and will return any excess over their claims to the receiver for distribution to the un secured creditors. The third class is known as par tially secured creditors and includes all who have se curity for part of the amount of their claims and whose duty it is to realize on the security which they hold and satisfy their claims as far as they may be able, from the assets pledged to them. Such persons rank with the unsecured creditors for any portion of their claims not satisfied. The fourth class, and in the majority of cases the largest both in number and amount, is that class known as unsecured creditors. Persons in this class rank for payment equally in whatever assets the receiver may have left after the first three classes have been satisfied.