Template:Insolvency v bankruptcy capsule
“Insolvency” is an oddly nebulous financial state — essentially that one cannot meet one’s debts as they fall due (cashflow insolvency), or one’s liabilities exceed one’s assets (balance-sheet insolvency) — while “bankruptcy” is a more determinate legal one: formal steps have been taken to administrate a legal entity or wind it up — usually owing to its insolvency.
An insolvent entity may file for bankruptcy or its creditors may petition for it. But it need not. Technically, insolvent entities can limp around indefinitely without entering formal bankruptcy. GameStop was arguably insolvent for much of 2019, and look at that unicorn now. Insolvency is usually, but not necessarily,[1] a precondition for bankruptcy.
The water is further muddied because contracts, notably such as the ISDA Master Agreement, conflate the concepts of insolvency and bankruptcy. ISDA’s crack drafting squad™ defines “Bankruptcy” to include measures of formal legal bankruptcy,[2] and measures of financial insolvency[3] and some that are a bit of both.[4]
But, bottom line: insolvency is an accounting concept. Bankruptcy is a legal one.
- ↑ Nothing’s easy, is it? It is not unheard of for a solvent entity to file for a “strategic bankruptcy”. But let us not get distracted.
- ↑ You really want to do this? Okay: True bankruptcy events: Section 5(a)(vii) limbs (1) (Dissolution), (4) (Institution of bankruptcy proceedings), (5) (Winding-up resolution), (6) (Appointment of administrator) and parts of (8) (Analogous events)
- ↑ Practical insolvency events: Section 5(a)(vii) limbs (2)(Cashflow insolvency and arguably balance sheet insolvency too) (3) (Composition with creditors)
- ↑ Hybrid events: Section 5(a)(vii)(7) (Enforcement of security)