Key Insolvency Indicators
Directors should ensure a company doesn’t trade while insolvent. It must be able to pay all of its debts, as and when they fall due. Directors must be able to reasonably believe a company has funds available (eg from increasing net revenue, asset sales or capital raising) to cover debts in appropriate time frames.
If the answer to one or more of the following questions is yes, it indicates possibility of insolvent trading.
Is working capital deficient? Are values of current assets being overstated? Are debtors being factored or has a book debt loan been negotiated to raise cash?
- Are trading losses being funded by injections of capital or non-payment of creditors? Are creditors putting unpaid statements in the hands of collecting agents, are creditors threatening legal action, or making statutory demands for payment?
- Are GST and tax payments overdue? Has the ATO issued Director Penalty Notices to directors’ home addresses rendering them personally liable for tax debt? Has the company a debt repayment plan with the ATO or other creditors?
- Do suppliers insist on COD payments or have they suspended supply? Has the company suddenly and inexplicably changed suppliers and/or opened a new bank account?
- Are insurance premiums unpaid? Is insurance inadequate or non-existent?
- Are the company’s records inadequate and poorly maintained? Are external accountants’ fees in arrears, rent unpaid, finance contracts ignored, bank overdrafts exceeded, and cheques being post-dated or dishonoured?
Remember: insolvent trading can be a criminal offence.
