What is Insolvency?

Legal Definition
Insolvency is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

Cash-flow insolvency is when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment. For example, a person may own a large house and a valuable car, but not have enough liquid assets to pay a debt when it falls due. Cash-flow insolvency can usually be resolved by negotiation. For example, the bill collector may wait until the car is sold and the debtor agrees to pay a penalty.

Balance-sheet insolvency is when a person or company does not have enough assets to pay all of their debts. The person or company might enter bankruptcy, but not necessarily. Once a loss is accepted by all parties, negotiation is often able to resolve the situation without bankruptcy.

A company that is balance-sheet insolvent may still have enough cash to pay its next bill on time. However, most laws will not let the company pay that bill unless it will directly help all their creditors. For example, an insolvent farmer may be allowed to hire people to help harvest the crop, because not harvesting and selling the crop would be worse for his creditors.

It has been suggested that the speaker or writer should either say technical insolvency or actual insolvency in order to always be clear - where technical insolvency is a synonym for balance sheet insolvency, which means that its liabilities are greater than its assets, and actual insolvency is a synonym for the first definition of insolvency ("Insolvency is the inability of a debtor to pay their debt.").

While technical insolvency is a synonym for balance-sheet insolvency, cash-flow insolvency and actual insolvency are not synonyms. The term "cash-flow insolvent" carries a strong (but perhaps not absolute) connotation that the debtor is balance-sheet solvent, whereas the term "actually insolvent" does not.
-- Wikipedia
Legal Definition
The state or condition of a person who is insolvent. (q. v.) .

2. Insolvency may be simple or notorious. Simple insolvency is the debtor's inability to pay his debts; and is attended by no legal badge of notoriety, or promulgation. Notorious insolvency is that which is designated by some public act, by which it becomes notorious and irretrievable, as applying for the benefit of the insolvent laws, and being discharged under the same.

3. Insolvency is a term of more extensive signification than bankruptcy, and includes all kinds of inability to pay a just debt. 2 Bell's Commentaries, 162, 6th ed.
-- Bouviers Law Dictionary
Legal Definition
The condition of a person who is insolvent; inability to.pay one's debts; lack of means to pay one's debts. Such a relative condition of a man's assets and liabilities that the former, if all made immediately available, would not be sufficient to discharge the latter. Or the condition of a person who is unable to pay his debts as they fall due or in the usual course of trade and business. See Dewey v. St. Albans Trust Co., 56 Vt. 475, 48 Am. Rep. 803 ; Toof v. Martin, 13 Wall. 47, 20 L. Ed. 481; Miller v. Southern Land & Lumber Co., 53 S. C. 364, 31 S. E. 281; Leitch v. Hollister, 4 N. Y. 215; Silver Valley Mining Co. v. North Carolina Smelting Co., 119 N. C. 417, 25 S. E. 954; French v. Andrews, 81 Hun, 272, 30 N. Y. Supp. 796; Appeal of Bowersox, 100 Pa. 438, 45 Ain. Rep. 387; Van Riper v. Poppenhausen, 43 N. Y. 75; Phipps v. Harding, 70 Fed. 470, 17 C. C. A. 203, 30 L. H. A. 513; Shone v. Lucas, 3 Dowl. & R. 218; Herrick v. Borst, 4 Hill (N. Y.) 652; Atwater v. American Exch. Nat. Bank, 152 III. 605, 38 N. E. 1017; Rug-gles v. Cannedy, 127 Cal. 290, 53 Pac. 916, 46 In R. A. 371. As to the distinction between bankruptcy and insolvency, see Bankruptcy.
See also
-- Black's Law Dictionary
Legal Definition
Inability to pay debts as they become due in the ordinary course of business. See 25 Or. 15, 42 Am. St. Rep. 756, 34 Pac. 692.
-- Ballentine's Law Dictionary