Solvency Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Solvency, written in plain English, along with examples of how it is used.
What is Solvency?
n. The term ‘Solvency’ is used to represent the state of possession of surplus assets over the liabilities. It is derived from the commonly used term insolvency which means a person or entity does not have enough assets to pay off his creditors.
History and Meaning of Solvency
Solvency is a vital term in financial topics that indicate the ability of a person, business or organization to pay off its debts or meet its obligations. It can be referred to as the available cash or assets that exceed the total debt or liabilities. The term solvency is derived from the word insolvent, denoting the opposite condition of being unable to pay debts.
The concept of solvency dates back to ancient Rome when merchants and traders had the practice of pooling finances to fund commercial ventures. The idea of responsibility for one's debts goes back even further to ancient times when in the Middle East, people who failed to pay debts were placed into servitude.
Examples of Solvency
A company's solvency ratio is calculated by dividing its net income by its total liabilities. If the ratio is greater than one, the company is considered solvent.
In bankruptcy proceedings, the court looks at a debtor's solvency to determine if they can repay their debts to creditors.
A bank may require individuals or businesses to provide evidence of solvency before issuing a loan or line of credit.
Solvency regulations in insurance require companies to maintain enough assets to cover potential claims from policyholders.
Legal Terms Similar to Solvency
Insolvency: The opposite of solvency, insolvency is a state in which an individual or organization lacks enough assets to pay off obligations.
Bankruptcy: Legal proceeding initiated by a debtor to discharge their financial obligations when they are unable to repay the debts.
Liquidation: The process of winding up a company's affairs, selling off its assets, and distributing the proceeds to its creditors.