Commonly regarded indicators of insolvency, as established in ASIC v Plymin 46 ACSR include:. A series of trading losses can lead to or be indicative of a shortage of working capital. An on-going current ratio of less than 1. The quick ratio examines the ability of a company to pay its debts by using its cash and near cash equivalents i.

A quick ratio of less than 1. The failure to lodge tax returns on time and the failure to maintain its payment obligations can be an indicator that a company is not able to meet all of its statutory obligations as and when they fall due. Often when a company is experiencing difficulty in meeting its obligations to trade creditors, it will neglect its taxation obligations to assist with cash flow.

An employer is also required to pay superannuation contributions to the relevant employee superannuation fund within twenty-eight 28 days of the quarter end, under Superannuation Guarantee Charge legislation. Similarly, superannuation obligations are often neglected in order to assist with trading cash flow. A company can seek to replace current debt with perhaps longer-term debt, usually borrowed on more relaxed lending criteria, however on less favourable terms i.

Any incoming financier would make that same financial assessment of a company as the current financier when extending credit. Equity capital is another form of financing that allows a company to gain access to cash.

Potential equity investors, knowing that an eventual return may be delayed or uncertain, are likely to be diligent in reviewing the finances and prospects of a company in an effort to be satisfied that the return is commensurate with the risk.

It is of concern if current shareholders are not willing to increase their stake in the company to ensure its future viability. It must be noted that a lack of investor confidence may be due to a number of reasons, including a lack of desired profitability, rather than solvency concerns.

This is a telling indicator of cash flow insolvency. This is clear evidence that a company does not have the current capacity to pay its debts which are due, and seeks to pay its current obligations with future cash inflows. The issuing of post-dated cheques shows that a company has extended past its current cash resources in attempting to satisfy its current debts.

Lump sum round payments are evidence that a company does not possess sufficient cash to meet its obligations as and when they fall due and instead resorts to making payments based on the cash available at the time, rather than payments for specific invoices within trading terms. Entering into such an arrangement is usually an admission that the business cannot meet the full debt when due, otherwise the arrangement would not be necessary.

The issuing of demands by solicitors is usually an indication that a creditor has exhausted all avenues to recover its outstanding debt and has sought the assistance of an external third party to assist with collection.

Indicators of Insolvency Checklist

Numerous demands from a number of solicitors will create a strong presumption of insolvency. Debts which are long overdue and have reached the stage of legal recoveries are a clear sign that a company is not able to repay its debts in a timely manner. A company is obligated to keep financial records that correctly record and explain its transactions and enable the preparation of true and fair financial statements pursuant to Section of the Corporations Act.

Indicators of Insolvency - Macks Advisory - Corporate Advisory, Restructure & Turnaround, Corporate & Personal Insolvency - Adelaide, South Australia

However, should a company fail to maintain this obligation then it is presumed that it is insolvent according to Section E of the Corporations Act. The mere fact that a company does not keep financial records does not necessarily mean that it is insolvent.

Insolvent Trading | Rapsey Griffiths

However, Courts have come to the conclusion that companies in financial distress will normally have records in disarray. Historically, an insolvent company usually does not have reliable financial information up to date and readily available.

Reluctance to update financial accounts is usually a product of directors avoiding the realisation that the company is in fact insolvent.

A company exhibiting a few of the above indicators may not necessarily be terminally insolvent, but may be simply experiencing short-term cash-flow problems. If numerous indicators are identified over a prolonged period of time, it then may be the case that the company is insolvent and consultation with Cor Cordis is recommended to assess your options.

Once insolvency is established, it can lead to some serious legal consequences for a company or individual.

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