Glossary · legal

Insolvency

Also called insolvent, balance-sheet insolvency, cash-flow insolvency.

Being unable to pay debts as they fall due, or owing more than you own — two different tests, either of which can trigger a contract clause long before any bankruptcy filing.

Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.

What it means

Two tests, and which one applies depends entirely on where the word appears.

Cash-flow or equitable insolvency.You cannot pay debts as they come due, whatever the balance sheet says. A profitable business with everything tied up in receivables can meet this test.
Balance-sheet insolvency.Liabilities exceed assets at fair valuation. The Bankruptcy Code uses a version of this — see 11 U.S.C. § 101(32).

Where each one bites

In bankruptcy, insolvency is presumed during the 90 days before a filing for the purposes of preference recovery under 11 U.S.C. § 547, which is why a supplier who was paid shortly before a customer's filing can be asked to give the money back. Fraudulent transfer law asks a related question about transfers made while insolvent or that rendered the debtor insolvent.

In contracts, insolvency appears in the events of default list and in credit insurance as the definition of an insured event. In each case the contract's own definition governs, and it is usually wider than the statutory one.

Before any filing

An insolvency event of default lets a lender accelerate, stop advancing, sweep collections, or call a guarantee, without a payment ever having been missed.

Where this one catches people

Read the definition in your agreement rather than the heading above it. Commercial insolvency clauses typically capture far more than a bankruptcy filing: admitting in writing an inability to pay debts, an assignment for the benefit of creditors, the appointment of a receiver over any part of the business, a judgment above a stated amount left unsatisfied for a set number of days, a tax lien filing, the suspension of business, or — the widest formulation — the lender's good-faith determination that you are or are likely to become unable to pay debts as they fall due.

That last one hands the trigger to your counterparty rather than to a court. It sits alongside the material adverse change clause and does similar work. Neither requires you to have missed anything.

The practical consequence is about what you say and to whom. An email to a funder explaining that you cannot make this week's payment can itself satisfy an "admits inability to pay" trigger. Get advice before putting that in writing.

Where you will meet this term

Merchant Cash Advance Term Loan Invoice Financing Asset-Based Lending

Read next

Acceleration clauseThe clause that makes everything still owed due immediately on default, rather than on the original schedule. BankruptcyA federal court process that halts collection and either liquidates a business or restructures its debts, wit… Credit InsuranceA policy covering non-payment by your customers, used by sellers to protect a concentrated receivables book a… Event of default (EOD)Any condition a contract lists as putting the borrower in default, most of which have nothing to do with miss… ForbearanceA written agreement in which a creditor holds off on its remedies for a defined period while the borrower per… Going concernThe accounting assumption that a business will keep operating for the foreseeable future — and, separately, t… JudgmentA court's final determination that one party owes another a sum of money, which converts a contractual claim … Leverage RatioAny of several ratios measuring how much of the business is funded by debt rather than owner capital, most of… Material adverse change (MAC)A clause letting a lender suspend funding, demand more collateral or call the facility when the borrower's co… RestructureA negotiated change to the terms of a distressed deal - smaller payments over a longer period, sometimes with…

Insolvency — common questions

What does insolvency mean?

Being unable to pay debts as they fall due, or owing more than you own — two different tests, either of which can trigger a contract clause long before any bankruptcy filing.

Where does insolvency catch people out?

Read the definition in your agreement rather than the heading above it. Commercial insolvency clauses typically capture far more than a bankruptcy filing: admitting in writing an inability to pay debts, an assignment for the benefit of creditors, the appointment of a receiver over any part of the business, a judgment above a stated amount left unsatisfied for a set number of days, a tax lien filing, the suspension of business, or — the widest formulation — the lender's good-faith determination that you are or are likely to become unable to pay debts as they fall due.

Is insolvency the same as an interest rate?

Insolvency is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does insolvency apply to?

Merchant Cash Advance, Term Loan, Invoice Financing, Asset-Based Lending.

Is there a worked example of insolvency?

Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.

What else should I read alongside insolvency?

Acceleration clause, Bankruptcy, Credit Insurance, Event of default, Forbearance.

Has this definition been checked?

Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.