Home > Kreisson Legal discuss risk indicators of insolvent trading

Kreisson Legal discuss risk indicators of insolvent trading

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According to Kreisson Legal , companies focus on defensive strategies to protect their businesses in light of the economic downturn and diminishing credit availability. Australian Securities Investments Commission have announced their focus this year will be on directors to ensure that they have taken the appropriate steps where their companies have become insolvent. Consequently, directors call in insolvency experts to examine the health of their books and in some cases, call in administrators also.

Understanding the warning signs of insolvency and obtaining the assistance of an experienced insolvency practitioner to assess and restructure at the appropriate time is important. This can make the difference between allowing the business to continue to trade and minimising a director’s potential personal exposure.

A company is considered insolvent if it is unable to pay the debts when they become due and payable. Directors need to defer this duty to the company accountant or at the time when they sign off on the yearly financial statements. Directors need to consider whether there are reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring a new debt.

While the Corporations Act 2001 (Cth) provides statutory defences for directors, these may not be available if directors have not taken steps to keep themselves apprised of the companies’ financial position and perform their general director duties to prevent insolvent trading.

Failure to do so can lead to both civil and criminal penalties including fines or imprisonment or both. Civil and criminal proceedings can also be commenced by Australian Securities Investments Commission, or by a creditor or a liquidator on behalf of creditors, which can lead to the personal bankruptcy of directors.

Following are some of the indicators of a company being at risk of insolvency:

  • Recurring losses
  • Weak cash flow
  • Overdue taxes, superannuation and workers’ compensation insurance
  • Difficult relationship with the bank and inability to borrow
  • No alternative finance and inability to raise further capital
  • Suppliers placing the company on cash on delivery (COD) terms
  • Creditors paid outside trading terms
  • Issuing post dated cheques or dishonouring cheques
  • Letters of Demand from creditors and/or solicitors, judgements or warrants issued against the company

These indicators are not exhaustive and need not be present for a company to be insolvent. If in doubt, an insolvency practitioner can conduct an assessment and recommend options including refinancing, restructuring or appointing an external administrator.

In order to ensure that the company remains financially sound and to minimise director exposure to the risk of insolvent trading, it is recommended that the above indicators are monitored regularly.

Lawyers can advise the directors on any breach of duties and also if they have business dealings with companies that experience financial difficulties. This is also integral to assessing and maximising the prospects of recovering debts and increasing cash flow and reducing your overall business risk.

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