Balance sheet insolvent

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1.

In broad terms, 'balance sheet insolvent' describes the situation where an entity's liabilities exceed its assets, usually as a result of accumulated losses.

The balance sheet insolvent entity has net liabilities, and negative equity.


Balance sheet insolvency is contrasted with 'cash flow insolvency', in which an entity does not have enough sources of liquidity to pay its immediate liabilities.

A cash flow insolvent entity might well have positive net assets and positive equity, but too many of its assets are illiquid.


2.

UK insolvency law.

In UK law the net assets/(liabilities) position of a company may be evidence of balance sheet insolvency, but it is not necessarily conclusive.

For legal purposes, balance sheet insolvency means the inability of a company - on a balance of probabilities - to meet all of its existing, prospective and contingent liabilities, taking account of future costs and of future interest obligations.

In making this assessment, future income and future asset valuations are also taken into account.


See also