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A business is considered insolvent if it is unable to meet its financial obligations as they reach maturity. Insolvency ultimately occurs when a business’s liabilities exceed their assets, which can be the result of poor cash flow, a significant increase in expenses or poor financial management. Facing insolvency can be incredibly overwhelming, however it’s important to know that there are options available to assist you.

Signs of Insolvency

If your business experiences signs of serious financial hardship, the earlier you take action, the better your chance at recovery. Indications your business is heading towards insolvency may include:

  • Frequently making a loss
  • The inability to secure finance
  • Repeatedly making late payments
  • Accruing tax debts and penalties
  • Poor financial record keeping
  • Strained supplier relationships and arrangements changing to COD (Cash on Delivery)
  • Receiving letters of demand or facing legal action

It is essential that businesses experiencing severe financial stress determine if they are insolvent. The consequences of continuing to trade whilst insolvent can be serious and may include personal liability or even criminal charges. There are two main tests used to determine solvency:

  1. Cash Flow Test
    The cash flow test is the leading test used by Australian courts to determine a company’s solvency. This test involves the assessment of:
  • Existing debts and their due dates
  • A company’s ability to meet future payments
  • Existing cash
  • Expected future income
  1. The Balance Sheet Test

A balance sheet insolvency test identifies whether a company has more total assets or liabilities. This test also considers contingent liabilities.

Book Consultation to discuss your financial challenges
Did you know that you can book a FREE consultation with one of our professional business consultants? We specialise in providing fast, easy and discrete advice to individuals and businesses facing insolvency Australia-wide. To make your appointment, phone 1300 277 148 or go to wisdombusinessconsultants.com.au.

What Options are Available to Insolvent Businesses?

Once a business is determined to be insolvent, there are three main procedures that may be entered into, including:

Voluntary Administration

Voluntary Administration occurs when company directors elect to appoint an external administrator. The administrator’s role is to assess the company’s financial situation and propose a Deed of Company Arrangement (DOCA) to the company’s creditors, return control of the company to its directors or provide a recommendation for liquidation.

Liquidation

When deemed insolvent, liquidation is the process of winding-up a company. Liquidation may be entered into voluntarily or involuntarily by a court order. In either situation, a registered insolvency practitioner or liquidator is appointed to assess and distribute the company’s assets and give the highest possible return to creditors.

Receivership

Receivership is a process initiated by a company’s bank or creditor in order to solely recover their debt. In this process, the creditor elects a Receiver, who has an obligation to give any funds recovered to the creditor in priority to other claims.

Here to help

Businesses that act early can, in some cases, make a full financial recovery, so it’s critical to take action at the first sign of insolvency. Ignoring the warning signs will only accelerate a business’s deterioration and can result in serious legal action being taken against the company or its directors, personally.

Fortunately, the friendly team at Wisdom are experienced in helping businesses navigate insolvency. We can assess your situation and formulate a plan that gives you the best possible result. We understand that all businesses experience financial challenges, so you can be sure you’ll have the support of a compassionate, caring and discrete team.

To get help on your path to recovery, contact us today:

📞 1300 277 148

✉️ help@wisdombc.com.au 🌐 https://wisdombusinessconsultants.com.au/

References

Revive Financial. ‘Receivership, Voluntary Administration and Liquidation Explained’, Revive Financial, Online, 2023, https://solutions.revivefinancial.com.au/articles/difference-between-receivership-va-and-liquidation (Accessed 17 March 2023)