The Solvency Two-Step

29 March 2013
By Dr. David Tabak

In this guest post from the Weil Bankruptcy Blog, NERA Senior Vice President Dr. David Tabak examines the economic relationship between the balance-sheet and cash-flow tests for insolvency. Questions of solvency often arise in bankruptcy and related matters such as claims of fraudulent conveyance. One would hope that such an important concept would have a single, clear definition along with a single test, but this is not the case. In fact, there are two standard definitions of solvency used in the courts along with associated tests. Dr. Tabak discusses the relationships between those tests and addresses the question of what to do if different tests yield apparently divergent results, either in terms of the ultimate solvency question or even on the degree to which a company is said to be either solvent or insolvent.