How Do You Know When A Company Is Insolvent?

Insolvent company

How Do You Know When A Company Is Insolvent?

It is vitally important that directors are able to recognise when a company is insolvent. Under the Corporations Act directors have a duty to prevent “insolvent trading.” That is, a director is prohibited from trading or incurring a debt if there are grounds to suspect that the company is insolvent, or will become insolvent as a result of trading.

A company is considered insolvent if it is unable to pay all its debts when they are due. However, at times it is hard to tell whether a company is in fact insolvent, or whether it is just going through some temporary hiccups.

Here are 7 tell-tale signs that trading may need to stop:

  1.  Creditors or suppliers are hounding you or placing you on cash-on-delivery terms.

  2. Debt recovery proceedings have been commenced against you.

  3. The business is consistently losing money and struggling to meet costs.

  4. Credit is maxed out.

  5. Taxes and superannuation liabilities are over-due.

  6. You are forced to pay off debts by installments.

  7. Cheques are bouncing or being post-dated.

Do not hesitate to seek advice if you find yourself in this position. A director who is found guilty of insolvent trading is held personally liable for compensation payments, can be banned from managing companies or even face criminal penalties. The best way to prevent this is to stay informed about the company’s finances by meeting regularly with your accountant and if necessary, appointing an administrator to take over financial affairs of the company. Fox & Staniland can work with your accountant to advise you on the best way to move forward.