We can’t be insolvent if we are making good profits
1. Definition
In the new hard times of possible coming Depression 2.0 originated in Wall Street, many companies may go to insolvency. Insolvency means the inability to pay one's debts.This is defined in two different ways: 1) Cash flow insolvency: unable to pay debts as they fall due; 2) Balance sheet insolvency: having negative net assets: liabilities exceed assets. A business may be cash flow insolvent but balance sheet solvent if it holds illiquid assets, particularly against short term debt. Conversely, a business can have negative net assets showing on their 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. 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. According to Section 123 of UK Insolvency Act 1986, insolvency is defined both in terms of cash flow and in terms of balance sheet in the: 1) A company is deemed unable to pay its debts; (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. (2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
Companies may be balance sheet insolvent but cash flow solvent and vice versa. A company cannot be considered solvent simply because its assets exceed its liabilities. Cash flows need to be looked at as well to determine whether the company can pay its debts as and when they ...