The 14 Indicators of Insolvency: A Case Study
Many of our clients, whether accountants, lawyers or company director(s) ask:
"When is the best time to call Chifley Advisory?”
Whether you are a company director, accountant or lawyer, it is critical to be aware when a business is heading towards stressful times. The ability to act quickly and diligently could prove highly useful in mitigating substantial financial losses, emotional stress, or in a worst-case scenario, criminal prosecution.
Fortunately, the court in the case of ASIC vs. Plymin (2003) has attributed 14 indicators towards possible company insolvency:
1. Continuing losses
2. Liquidity ratios below 1
3. Overdue Commonwealth and State taxes
4. Poor relationship with present Bank, including the inability to borrow further funds
5. No access to alternative finance
6. Failure to raise additional equity capital
7. Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply
8. Creditors unpaid outside trading terms
9. Issuing of post-dated cheques
10. Dishonoured cheques
11. Special arrangements with selected creditors
12. Solicitors’ letters, summons, judgments, 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
For some, the display of a few of these indicators within a business might be a symptom of short-term cash flow issues. Still, proactive steps towards early identification and remediation may save the company and protect the Director from personal liability due to breaching his or her duties. The causes of suspected company insolvency might be due to matters outside of the director’s control, but ultimately, it is their responsibility to be aware and proceed to act within the constraints of the law and seek proper financial and legal advice.
If you would like to discuss this further, you are welcome to contact me on 02 8075 1045 or email firstname.lastname@example.org.