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 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.
- ↑ 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)