Indicators of potential insolvency or significant financial challenges

Whilst every business is different, there are often similar characteristics which indicate potential insolvency or at least significant financial challenges ahead. In addition to these indicators, there are certain issues, which may make a restructure more difficult.

In ASIC v Plymin [2003] VSC 123, Mandie J outlined 14 indicators of insolvency, which are:

1)      Continuing losses.

2)      Liquidity ratios below 1.

3)      Overdue Commonwealth and State taxes.

4)      Poor relationship with present 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 unpaid outside trading terms.

9)      Issuing of post-dated cheques.

10)   Dishonored cheques.

11)   Special arrangements with selected creditors.

12)   Solicitors’ letters, summons[es], 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.

These 14 indicators are self-explanatory and relate to cash flow, creditor relationship and financial information indicators. Having a cash flow forecast and accurate financial information should allow a business owner/director to identify issues early and take steps to avoid the more terminal indicators.

To assist our accountant and lawyer clients, WCT Advisory Group has developed a simple checklist to identify which of their clients may require some additional assistance from appropriately qualified persons. The checklist is available on request.

WCT Advisory Group can assist your clients navigate the challenges arising when they suspect their business/company is in financial difficulty. However, it is recommended professional advice should be obtained as early as possible. These issues do not solve themselves and rarely go away on their own.