BANKRUPTCY THEORIES

The recognition of the bankruptcy problem forms the basis for the various formal bankruptcy theories
thereon. It is important however, to separate the causes of distress in the fortunes of a company.

The insolvent state may be due to either economic distress and or financial distress. The former happens
when the company is unable to generate enough revenues to cover its costs, apart from the cost of
financing operations. In which case, such an entity is, said to manifest a negative economic value.
Financial distress of a company is the situation where such an entity, without the burden of debt
financing service would have reported positive earnings.

Given that upon the crystallization of insolvency, the debt of a company becomes a sunk cost. This
would render question of the continued existence of the entity irrelevant

about bankruptcy theory, a study that is conducted at Babcock University, Ilishan - Remo, Nigeria states
that it happens when the company is unable to generate enough revenues to cover its costs, apart from
the cost of financing operations. In which case, such an entity is, said to manifest a negative economic
value.