Am I Insolvent?

Know the Warning Signs & Beware of the Consequences!

One of the most notable factors in our experiences in dealing with directors and sometimes their advisors, is that they are not inherently aware of the warning signs that a business is failing and may in fact already be insolvent.

In many instances the business was insolvent for a significant period prior to the appointment of external turnaround advisors, administrators or liquidators if necessary.

So what are the warning signs?  There are many but thankfully a court case – ASIC v Plymin (2003) 46 ACSR 126 essentially created the following checklist of insolvency indicators which we can follow:

1. Continuing losses.
2. Liquidity ratios below 1.
3. Overdue commonwealth and state taxes
4. Poor relationship with Bank, including inability to borrow further funds.
5. No access to alternative finance.
6. Inability to raise further equity capital.
7. Suppliers placing company on COD, or otherwise demanding special payments before resuming supply.
8. Creditors paid outside trading terms.
9. Issuing post dated cheques
10. Dishonoured cheques
11. Special arrangements with selected creditors.
12. Solicitors letters, summonses, judgements, or warrants issued against the company.
13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

These indicators can be broadly categorised into 3 segments:

Balance Sheet indicators

1. Continuing losses.
2. Liquidity ratios below 1

Cash Flow indicators

3. Overdue commonwealth and state taxes
4. Inability to raise further equity capital.
5. Creditors paid outside trading terms.
6. Issuing post dated cheques
7. Dishonoured cheques
8. Payments to creditors of rounded sums which are not reconcilable to specific invoices.

Other indicators

9. Poor relationship with Bank, including inability to borrow further funds.
10. No access to alternative finance.
11. Suppliers placing company on COD, or otherwise demanding special payments before resuming supply.
12. Special arrangements with selected creditors.
13. Solicitors letters, summonses, judgements, or warrants issued against the company.
14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

Of course the indicators need to be aligned with real life factors and commercial considerations. Such as:

1. A company may have requested COD to manage aged payables
2. Payments outside terms are normal in some industries
3. Some industries are revenue poor and capital intensive and vice versa.

Each company has its own unique set of circumstances, but on the whole, the indicators will apply.

If your business is experiencing a number of these indicators you should speak to your advisors and identify if there is an underlying problem in the business that needs to be addressed or if the business is suffering temporary problems.  If temporary, plans should be made before the fact to determine what the outcomes are if the temporary problem manifests into a larger problem.  This is usually the stage where your accountant or specialist turnaround advisor (if required) can provide real guidance and assist your business to prosper before any problems occur or worsen.

If you manage to tick a number of the indicators, especially if they are the cashflow and other indicators, it may point to the fact that there are significant underlying issues and the company may already be insolvent.  You should seek urgent advice from your external accountant and a specialist insolvency advisor to discuss the severity of your position and all of the options available to you.

Often insolvent companies will be placed into liquidation.  In such circumstances where a company continued to trade whilst insolvent, the directors can be found to be personally liable for the debts incurred.

Accordingly directors should take heed of the indicators of when a company is insolvent.

For further advice in regard to you or your clients business, its solvency position or the consequences of same do not hesitate to contact one of our directors.