Two common ways to assess insolvency
Cash-flow insolvency concerns the ability to meet debts when they fall due. Balance-sheet insolvency concerns liabilities exceeding assets under the relevant valuation and legal rules.
These concepts are not interchangeable. A business may own valuable equipment but lack cash for tomorrow's payments. Legal tests differ by jurisdiction and purpose, including treatment of contingent liabilities.
Insolvency and formal proceedings
Financial distress does not automatically mean a bankruptcy petition has been filed. Restructuring, negotiated arrangements, administration, liquidation, or bankruptcy may be available depending on the jurisdiction and circumstances.
For a jurisdiction-specific example, see the UK Insolvency Service's company guidance. Its rules should not be assumed to apply elsewhere.
What a creditor should do
Verify the debtor's identity and any formal proceeding. Preserve invoices, contracts, payment records, and relevant notices. Route legal notices promptly for review of deadlines and restrictions.
An overdue invoice alone does not establish insolvency. Nor does insolvency give a creditor unrestricted authority to seize assets or promise a particular recovery. Decisions need the applicable legal and financial context.