Two ways the question gets measured
Insolvency is usually tested in one of two ways: whether debts exceed the fair value of assets, or whether the company can pay its obligations as they come due. A business can fail one test and pass the other, and the answer can differ depending on how assets are valued. The question carries weight because many rules look backward to it. Payments made, collateral granted, and assets moved while a company was insolvent can later be challenged by creditors or by a bankruptcy trustee. The same condition also matters for individuals, including in how canceled debt is treated for tax purposes.
How decisions get judged once it applies
When a company is insolvent, directors and officers should expect their choices to be examined with creditors' interests in view, and how far that reaches a company only near insolvency depends on the state where it was formed. Paying insiders, repaying loans from owners, or favoring one creditor over others are the moves that tend to draw scrutiny later. Keep board minutes that show what information was considered and why a decision was made. Preserve financial statements, aging reports, and cash forecasts from the period, since a later dispute will turn on what was known at the time. Valuations prepared for other purposes, such as financing, often become evidence.
The paths available from here
Insolvency does not require a bankruptcy filing. Some companies negotiate a workout with lenders and vendors, some use a state-law assignment for the benefit of creditors or a receivership, and some file under Chapter 7, Chapter 11, or Subchapter V. Which path makes sense depends on whether the business has a future, how its assets are encumbered, and whether personal guarantees are involved. We start by reviewing the current numbers and recent transactions, so you know what is exposed. From there we discuss which path protects the most value and what should not happen in the meantime.
