Actual insolvency is a type of insolvency that involves a debtor being unable to pay their debts when they fall due and payable. This type of insolvency can be contrasted with technical insolvency whereby a company (or individual) has a greater sum of liabilities than assets. In Australia, section 95A of the Corporations Act 2001 (Cth) outlines the circumstance that an entity is solvent, being that they are able to pay all the person’s debts, as and when they become due and payable. The definition in section 95A is negatived in the sense that a person who is not solvent is insolvent. Actual insolvency is not the same as a lack of liquidity and a company will not be insolvent if they can meet their debts through restructure, sale or charge of its assets.
Actual insolvency is important in terms of directors of a company complying with section 588G of the Corporations Act 2001 (Cth) and not trading (i.e. incurring debts) whilst a company is insolvent and applications under section 459P for an order under section 459A to have an insolvent company wound up.