Equity insolvency occurs when a debtor, typically a corporation, is unable to pay its debts as they become due. This situation often leads to restrictions on the corporation's ability to distribute assets to its shareholders. Essentially, equity insolvency indicates a financial state where liabilities exceed assets, impacting the entity's operational capabilities.
This term is commonly used in corporate law and bankruptcy proceedings. It is essential for determining when a corporation can legally distribute profits to shareholders. Understanding equity insolvency can help businesses navigate financial difficulties and avoid legal repercussions related to improper distributions. Users may find relevant forms and templates through US Legal Forms to assist in managing these situations.
Here are a couple of examples of abatement:
(Hypothetical example) A corporation has total liabilities of $1 million and assets worth only $800,000. Due to cash flow issues, it cannot meet its monthly obligations of $100,000. In this scenario, the corporation is considered equity insolvent and cannot pay dividends to its shareholders.
| State | Equity Insolvency Definition |
|---|---|
| California | Follows similar principles as federal law regarding equity insolvency. |
| Delaware | Has specific statutes governing corporate distributions and insolvency. |
This is not a complete list. State laws vary and users should consult local rules for specific guidance.
| Term | Definition | Difference |
|---|---|---|
| Bankruptcy | A legal process for individuals or businesses unable to repay debts. | Bankruptcy involves court proceedings, while equity insolvency does not necessarily. |
| Cash Flow Insolvency | Inability to pay debts as they come due, regardless of asset value. | Equity insolvency focuses on the balance sheet, while cash flow insolvency focuses on liquidity. |
If you believe your corporation is facing equity insolvency, consider the following steps:
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It is a financial state where a corporation cannot pay its debts as they come due.