Accountant Connect - Key Indicators of Insolvency
A quick reference check list of insolvency warning signs
Directors have a duty to ensure that their company does not trade whilst insolvent. A key test of a company’s solvency is whether it will be able to pay all of its debts as and when they fall due (not overdue). There must be reasonable grounds to expect that funds will be available and within the appropriate time frame, e.g. from increased (net) revenue, asset sales, capital raising etc.On what basis do you advise your clients to pass the annual solvency resolution within 2 months of the company’s anniversary date? What consideration is given to this critical issue?
To assist you in advising your clients here is a list of indicators. If the answer to one or more of these is ‘Yes’ it may be cause for concern and potentially insolvent trading.
| Working capital deficient – ensuring current assets are at realisable value and not overstated | Insurance premiums unpaid or insurance non-existent or inadequate | ||
| Incurrence of trading losses – how is the loss funded – delaying or non payment of creditors, injection of share capital etc? | Default on bank facilities Opening second or alternative bank account | ||
| Demands/legal action by creditors e.g. overdue statements, collection agents, Statutory Demands | Accounting records poor or non-existent – deemed insolvency? | ||
| Non/late lodgment of BAS and other taxation returns | Sale/assignment of debtors (factoring or book debt loan) to generate instant cash | ||
| ATO issues late/overdue notices against company | External accountant’s fees in arrears | ||
| ATO issues Director Penalty Notice on Director’s home address, rendering director personally liable | Unpaid rent on premises or overdue finance contracts | ||
| Company has entered into repayment arrangement with ATO or other creditors | Post dating of cheques | ||
| Statutory creditors not paid on time, e.g. PAYG, Superannuation, GST, payroll tax | Cheques being dishonoured | ||
| Slow debtor recoveries (shown by increase in debtor ageing) and increased bad debts | Bank overdraft being exceeded (or cheques being withheld or recorded as unpresented until funds become available) | ||
| Suppliers have stopped supply or insist on COD terms. Change of supplier? Why? | Creditors outstanding beyond trading terms and increasing in value | ||
| Creditors being paid in part payments (round sum payments, cheques drawn to cash, etc.) |
