Insolvency

Category: finance

The financial state where a company’s total liabilities exceed its total assets, or it is unable to pay its debts as they come due.

Insolvency is the "condition," whereas bankruptcy is the "legal process." You can be insolvent for years without going bankrupt. There are two tests: "Balance Sheet Insolvency" (debts > assets) and "Cash Flow Insolvency" (can’t make payroll on Friday).

Common Examples

• The sudden spike in interest rates pushed the highly leveraged commercial real estate firm into deep balance sheet insolvency.
• When a company reaches insolvency, the directors’ fiduciary duty shifts from maximizing shareholder value to protecting the creditors’ assets.