If you’re a company director then insolvent trading can be a big risk for you. Especially if you have personal assets to protect. So it’s extremely important that you understand the indicators of company insolvency so you can act quickly if any of them are present in your company.
When is a company insolvent?
A company is insolvent if it is unable to pay its debts as and when they are due and payable.
How do I tell if my company is insolvent?
Company directors and their advisors often face a difficult task in making a proper informed decision regarding whether or not a company is insolvent. To assist directors and their advisors in situations where they suspect that a company may be insolvent, or may become insolvent, the Australian Securities & Investments Commission have published the following list of warning signs of insolvency1:
- Ongoing losses.
- Poor cash flow.
- Absence of a business plan.
- Incomplete financial records or disorganised internal accounting procedures.
- Lack of cash-flow forecasts and other budgets.
- Increasing debt (liabilities greater than assets).
- Problems selling stock or collecting debts.
- Unrecoverable loans to associated parties.
- Creditors unpaid outside usual terms.
- Solicitors’ letters, demands, summonses, judgements or warrants issued against your company.
- Suppliers placing your company on cash-on-delivery (COD) terms.
- Issuing post-dated cheques or dishonouring cheques.
- Special arrangements with selected creditors.
- Payments to creditors of rounded sums that are not reconcilable to specific invoices.
- Overdraft limit reached or defaults on loan or interest payments.
- Problems obtaining finance.
- Change of bank, lender or increased monitoring/involvement by financier.
- Inability to raise funds from shareholders.
- Overdue taxes and superannuation liabilities.
- Board disputes and director resignations, or loss of management personnel.
- Increased level of complaints or queries raised with suppliers.
- An expectation that the ‘next’ big job/sale/contract will save the company.
The above list published by the ASIC is by no means exhaustive, and it is often difficult for company directors and their advisors to properly assess a company’s solvency given relevant indicia of insolvency and applicable law. Accordingly, given the effects that the insolvent trading of a company may have on a company director’s personal financial position, company directors and their advisors may wish to obtain appropriate advice and assistance in circumstances where they consider that there is a risk of insolvent trading.
What do I do if my company is insolvent?
If you’re concerned that your company is trading while insolvent and want to ensure you avoid personal liability you should get in touch today on 1300 4 CACTUS or by email to firstname.lastname@example.org. Together with our partners at Safe Harbour Protect we can formulate solutions for dealing with your financially distressed company.
1. ASIC Information Sheet 42, “Insolvency: a guide for directors”, available from the ASIC website.