Equity insolvency refers to insolvency that is created when a debtor cannot meet its obligations as they fall due. Under most state laws, equity insolvency prevents a corporation from making a distribution to its shareholders.
The following is a case law defining equity insolvency:
When entity is generally unable to pay its debts as they come due is termed as equity insolvency.[S. Canaan Cellular Invs. LLC v. Lackawaxen Telecom, Inc. (In re S. Canaan Cellular Invs. LLC), 2010 Bankr. LEXIS 2847 (Bankr. E.D. Pa. Aug. 19, 2010)].