Insolvency is the inability to pay one’s debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.

In the UK, Insolvency is defined both in terms of cash flow and in terms of balance sheet in the UK Insolvency Act 1986, Section 123, which reads in part:

123. Definition of inability to pay debts

(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. This is known as cash flow insolvency.

(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. This is known as balance sheet insolvency.