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Simple English definitions for legal terms
balance-sheet test
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A quick definition of balance-sheet test:
A balance-sheet test is a way to determine if a company is insolvent, which means they cannot pay their debts. This happens when a company's liabilities (what they owe) are more than their assets (what they own). Some states have laws that prevent a company from giving money to their shareholders if they are balance-sheet insolvent. This is different from equity insolvency, which is when a company cannot pay their debts as they become due.
A more thorough explanation:
Definition: The balance-sheet test is a measure of insolvency where a debtor's liabilities exceed its assets. This means that the debtor is unable to pay its debts as they fall due or in the usual course of business.
For example, if a company owes more money than it has in assets, it is considered balance-sheet insolvent. This can prevent the company from making distributions to its shareholders under some state laws.
Another type of insolvency is equity insolvency, which occurs when a debtor cannot meet its obligations as they fall due. This also prevents a corporation from making distributions to its shareholders under most state laws.
Overall, the balance-sheet test is an important measure of a company's financial health and ability to meet its obligations.