Insolvency

Insolvency is a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities, commonly referred to as 'balance-sheet' insolvency, or when the person or entity can no longer meet its debt obligations when they come due, commonly referred to as 'cash-flow' insolvency. The term is often incorrectly used as a synonym for bankruptcy, which is a distinct concept, except in Germany.

A state of insolvency generally leads to a legal finding of bankruptcy. However, because putting a person or entity into bankruptcy requires the payment of court fees, an insolvent person or entity may be insolvent and not legally bankrupt.

In most jurisdictions, it is an offence under the bankruptcy laws for a corporation to continue in business once it is insolvent. It is also usually 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. When determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the bankruptcy, will usually be the primary consideration. However in the UK, both are relevant. For example, if a corporation pays a large bonus to its management several months before it actually files for bankruptcy protection, the court will not look at the date of the bankruptcy filing, but at the date where the corporation's debts exceeded its liabilities, and/or the date at which it was unable to pay its debt obligations when they became due, in determining whether the directors can be sued for the return of the bonuses.