Insolvency

Insolvency is the inability of a debtor to pay their debt. Cash flow insolvency involves a lack of liquidity to pay debts as they fall due. Balance sheet insolvency involves having negative net assets—where liabilities exceed assets. Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency.

A business may be cash-flow insolvent but balance-sheet solvent if it holds illiquid assets, particularly against short term debt that it cannot immediately realize if called upon to do so. Conversely, a business can have negative net assets showing on its balance sheet but still be cash-flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default: for instance, if it holds long term debt. Many large companies operate permanently in this state. However, Bankruptcy is when the individual is cashflow insolvent and at the same time balancesheet insolvent.

Read more about Insolvency:  Definition, Consequences of Insolvency, Debt Restructuring, Government Debt, Insolvency Law in Individual Countries

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