Insolvency Warning Signs

Directors should be on the alert for the following warning signs of insolvency, which have been identified by the Australian Courts and the Australian Securities and Investments Commission:

  • 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.

In addition, if a director receives a s222AOE penalty notice from the Australian Taxation Office (also known as a director penalty notice) for their company’s unpaid tax, the director should immediately seek professional advice. Failure to take appropriate steps within 21 days may result in the Commissioner of Taxation taking recovery action against the director personally for an amount equivalent to the unpaid tax.

The Australian Securities and Investments Commission, recommends that directors consult an appropriately qualified specialist insolvency accountant or lawyer, a financial advice service or a registered liquidator about their company’s financial situation as soon as possible if they suspect that the company cannot pay debts when they are due.

In our view, directors should be seeking external advice from a restructuring advisor well before they contemplate the need for the appointment of a voluntary administrator. If handled properly, early intervention by a qualified restructuring advisor may completely avoid the need to appoint a voluntary administrator in future.

If you need any guidance or assistance with a corporate restructuring, insolvency or a personal bankruptcy matter, please contact one of the William Buck Business Recovery Specialists.