Template:Insolvency v bankruptcy capsule: Difference between revisions

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“[[Insolvency]]” is an oddly nebulous financial status — essentially that one cannot meet one’s debts as they fall due ([[cashflow insolvency|''cashflow'' insolvency]]), ''or'' one’s liabilities exceed one’s assets ([[Balance sheet insolvency|''balance-sheet'' insolvency]]) — while “bankruptcy” is a ''legal'' one: formal steps have been taken to administrate a legal entity or wind it up.  
“[[Insolvency]]” is an oddly nebulous ''financial'' state: essentially, that one cannot meet one’s debts as they fall due ([[cashflow insolvency|''cashflow'' insolvency]]), ''or'' that one’s liabilities exceed one’s assets ([[Balance sheet insolvency|''balance-sheet'' insolvency]]); while “bankruptcy” is a more determinate ''legal'' state: definitive formal steps have been taken to put a legal entity into administration, or to wind it up, usually ''on account of'' its [[insolvency]].  


An insolvent entity may file for bankruptcy or its creditors may petition for it. But it need not.<ref>Indeed, it is not unheard of for a solvent entity to file for a “strategic bankruptcy”. But let us not get distracted.</ref> 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.  
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 ever entering formal bankruptcy. [[GameStop]] was arguably insolvent for much of 2019, and look at ''that'' sweet [[unicorn]] now.  


The water is further muddied because notable contracts such as the {{isdama}} ''conflate'' insolvency and bankruptcy: its definition of “{{isdaprov|Bankruptcy}}” includes measures of formal legal bankruptcy,<ref>You really want to do this? Okay: Section {{isdaprov|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'')</ref> measures of financial insolvency<ref>Section {{isdaprov|5(a)(vii)}} limbs (2)(''Cashflow insolvency'' and arguably ''balance sheet insolvency'' too) (3) (''Composition with creditors'') </ref> and some that are a bit of both.<ref>Section {{isdaprov|5(a)(vii)}}(7) (''Enforcement of security'')</ref>
Insolvency is usually, but not ''necessarily'',<ref>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.</ref> a precondition for [[bankruptcy]].


But, bottom line: ''[[insolvency]]'' is an accounting concept. ''[[Insolvency|Bankruptcy]]'' is a legal one.
The water is further muddied because many [[finance contract|finance contracts]], and notably the {{isdama}}, ''conflate'' the concepts of insolvency and bankruptcy. {{icds}} defines “{{isdaprov|Bankruptcy}}” to include measures of formal legal bankruptcy,<ref>You really want to do this? Okay: ''True'' bankruptcy events: Section {{isdaprov|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'')</ref> ''and'' measures of financial insolvency<ref>Practical insolvency events: Section {{isdaprov|5(a)(vii)}} limbs (2)(''Cashflow insolvency'' and arguably ''balance sheet insolvency'' too) (3) (''Composition with creditors'') </ref> and some that are a bit of both.<ref>Hybrid events: Section {{isdaprov|5(a)(vii)}}(7) (''Enforcement of security'')</ref>
 
But, bottom line: ''[[insolvency]]'' is an accounting concept; ''[[bankruptcy]]'' a legal one.

Latest revision as of 17:19, 12 September 2024

“Insolvency” is an oddly nebulous financial state: essentially, that one cannot meet one’s debts as they fall due (cashflow insolvency), or that one’s liabilities exceed one’s assets (balance-sheet insolvency); while “bankruptcy” is a more determinate legal state: definitive formal steps have been taken to put a legal entity into administration, or to wind it up, usually on account of 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 ever entering formal bankruptcy. GameStop was arguably insolvent for much of 2019, and look at that sweet unicorn now.

Insolvency is usually, but not necessarily,[1] a precondition for bankruptcy.

The water is further muddied because many finance contracts, and notably 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 a legal one.

  1. ↑ 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.
  2. ↑ 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)
  3. ↑ Practical insolvency events: Section 5(a)(vii) limbs (2)(Cashflow insolvency and arguably balance sheet insolvency too) (3) (Composition with creditors)
  4. ↑ Hybrid events: Section 5(a)(vii)(7) (Enforcement of security)
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