Insolvency is generally defined as a financial state in which a company can no longer pay its bills and other obligations on time. Insolvency occurs whenever liabilities, or debts, exceed assets and cash flow. Once a company becomes insolvent, it must take immediate action to generate cash and settle or renegotiate current debts. Companies which cannot successfully pull themselves out of insolvency often face bankruptcy proceedings, receivership, or liquidation of all assets
Insolvency is commonly confused with bankruptcy, and the two concepts are not dissimilar. Both insolvency and bankruptcy deal with liabilities exceeding assets, but insolvency is a state of being and bankruptcy is a matter of law. Companies can be insolvent but not legally bankrupt. Insolvency can lead to bankruptcy, but the condition may also be temporary and fixable without legal protection from creditors.