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Insolvency means the inability to pay one's debts as they fall due. Usually used in Business terms, insolvency refers to the inability for a company to pay off its debts.
Business insolvency is defined in two different ways:
- Cash flow insolvency
- Unable to pay debts as they fall due.
- Balance sheet insolvency
- Having negative net assets – in other words, liabilities exceed assets.
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 realise 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.
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. (Insolvency Law. In Wikipedia, The Free Encyclopedia.)
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