Free US Law Dictionary

Insolvency

Insolvency exists for a person or organization when total financial liabilities exceed total financial assets. A related financial condition, sometimes referred to as cash-flow insolvency, exists when a person or organization can not meet its financial obligations as they come due. In business situations, accountants in the US refer to this as a working capital deficit.

Insolvency is not a synonym for bankruptcy, which in the US is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency.

In some jurisdictions, it is an offence under the insolvency laws for a corporation to continue in business while insolvent, though in others the business may continue under a declared protective arrangement while alternative options to achieve recovery are worked out.[citation needed] Increasingly, legislatures have favoured alternatives to winding up companies for good.[citation needed]

It can be grounds for a civil action, or even an offence, to continue to pay some creditors in preference to other creditors once a state of insolvency is reached.[citation needed]