Insolvent | Practical Law

Insolvent | Practical Law

Insolvent

Insolvent

Practical Law ANZ Glossary w-010-4855 (Approx. 3 pages)

Glossary

Insolvent

For the purposes of the Corporations Act 2001 (Cth) (CA 2001), a company that is not solvent is insolvent (section 95A, CA 2001).
Sections 5(2) and 5(3) of the Bankruptcy Act 1966 similarly provide that a person:
  • Is solvent if the person is able to pay all the person's debts, as and when they become due and payable.
  • Who is not solvent is insolvent.
The two main approaches to determine whether a company or an individual is insolvent are:
  • A "cash flow" test, which looks to whether there is sufficient cash (and other realisable assets) available to a company (or a person) to pay creditors as debts fall due for payment.
  • A "balance sheet" test, which looks to the overall asset position of a company (or a person) and assesses solvency by reference to the value of assets in comparison to total liabilities.
(See Practice note, Corporate insolvency and related directors' duties: Approaches to assessing insolvency: "cash flow" versus "balance sheet".)
There are also a number of widely accepted key indicators of insolvency (see Practice note, Corporate insolvency and related directors' duties: Indicators of insolvency).