Template:Insolvency v bankruptcy capsule
“Insolvency” is an oddly nebulous financial status — 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 legal one: formal steps have been taken to administrate a legal entity or wind it up.
An insolvent entity may file for bankruptcy or its creditors may petition for it. But it need not.[1] 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.
The water is further muddied because notable contracts such as the ISDA Master Agreement conflate them: its definition of “Bankruptcy” includes measures of formal legal bankruptcy,[2] 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.
- ↑ Indeed, 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: 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)
- ↑ Section 5(a)(vii) limbs (2)(Cashflow insolvency and arguably balance sheet insolvency too) (3) (Composition with creditors)
- ↑ Section 5(a)(vii)(7) (Enforcement of security)