I have no problem if a business that is balance-sheet insolvent argues that it is still cash-flow solvent and should therefore be allowed to operate in hope of achieving balance-sheet solvency.

I actually have no problem with a business operating in a perpetual state of balance sheet insolvency. If the creditors are happy and getting the payments they desire, the employees are happy and the owners are happy then there just isn't any issue. No expectation of, desire for or hope that that particular number to be positive is required. It just isn't an important number.

What I do have a problem with, however, is claiming to be balance-sheet solvent while being cash-flow insolvent. There is simply no good reason to grant anyone that status in any circumstances. Either money can be readily borrowed against the positive net assets, or the accounting on which the claim about the positive net worth is based is fraudulent one way or another.

It does seem like being balance sheet solvent but cash flow insolvent should be impossible in an efficient market with optimal laws in place. And I agree that usually a discrepancy here implies dubious accounting.

Of course things being this neat essentially requires the balance sheet assets to exactly track (or never fall below) the value at which a creditor would loan money based on that asset. Yet it becomes complicated when I, as a potential creditor, expect the business to fare poorly in the future. In that case the amount I would pay to purchase the asset is greater than the amount that I would loan because of the asset (unless I can get some sort of shifty deal where I am paid back first.) Since some assets are essentially the core of the business and cannot realistically be sold while still maintaining the business at all this puts them in a position that can legitimately be described as cash flow insolvent but balance flow solvent. This is a rather strong sign that is time to disband the company and sell the pieces!