Sometimes, a company falls out of the public’s favour, competition becomes too tough, debts become untenable, or a recession hits at the worst possible time. Regardless of the reason for its occurrence, insolvency – loosely defined as the financial scenario when an individual or an organisation is unable to pay its debts as they become due – is a natural risk of doing business.
Lists of large-scale insolvencies read like a who’s who of how not to run a business, with names like Lehman Brothers, Enron, WorldCom, and (to a degree) GM and Chrysler, but, when it comes to the word and the process itself, many people simply know that it is something to be avoided.
As for the term, it is Latin in origin, with the prefix in meaning ‘not’, and solventem, meaning ‘paying’. In practice though, there are several different types of insolvency. The most common form that individuals and businesses encounter is cash-flow insolvency, meaning that there is not enough cash on hand to pay the bills that are due. Aside from this, other forms involve being insolvent ‘on paper’,meaning that total liabilities (debts) are greater than the value of total assets (things you own).
When it comes to the history of insolvency, it is probably as long as the history of humanity. Where for long centuries, debtors were forced into a debt slavery, corporal punishment and social stigma. The changes in the credit market and business science in the nineteenth century helped insolvency be seen as an economic rather than as a moral failure, and led to the established of modern bankruptcy laws.
And while accounting has no need for translation, much like language, what happens when the numbers do not add up differs from country to country. Though all countries have somewhat similar insolvency and bankruptcy proceedings, there are key differences. For example, Canada offers different structures/proceedings based on the overall level of debt, and in the UK (if the insolvency requires closing the business), companies can effectively begin the process outside of court proceedings.
The first known use of the term comes from a work entitled Ductor Dubitantium (or The Rule of Conscience), written by Bishop Jeremy Taylor in 1660, which stated that: “If the Father be under torment or imprisonment for insolvency.”
Though the term has been used outside of the realm of finance, such as in an 1896 issue of the Daily News (now Daily Mail), where the word was used to mean a failure to meet engagements (“Was there ever such a confession of diplomatic insolvency?”), the typical usage has always been related to finance.