What it is:
In most usages, insolvency is the inability of a company or individual to meet its financial obligations as they come due. In the legal sense of the word, an entity is considered insolvent if its total liabilities exceed its total assets.
How it works (Example):
In this case, the company must raise capital to pay its obligations via selling assets, borrowing, or somehow raising capital and/or reducing expenses.
If a company cannot meet its obligations, it may be forced to file for bankruptcy.