bankruptcy
How should your business handle a statutory demand?

A healthy check of your company

Director’s should be mindful of the indicators of insolvency and regularly check whether their businesses are struggling to meet debts as and when they fall due.

If there are any signs of insolvency, proactive steps need to be taken to ensure any shortages in cash flow are resolved quickly and do not become overwhelming to the point where the financial difficulties of the company are irreversible.

Director’s often use the non-payment of taxation liabilities, personal finances (including credit cards), loans from family and friends in order to resolve their Company’s short term cash flow problems. This is often not a problem as the Company will generate sufficient revenue with which to discharge these debts, however if the Company’s cash flow problem is not short term these types of solutions can have devastating effects on the company’s business, stakeholders and for the director personally.

Mandie J in ASIC v Plymin (2003) 46 ACSR 126 referred to a checklist of indicators of insolvency as follows:

  1. Continuing losses
  2. Liquidity ratios below 1
  3. Overdue Commonwealth and State taxes
  4. Poor relationship with present Bank, including inability to borrow further funds.
  5. No access to alternative finance.
  6. Suppliers placing Company on COD, or otherwise demanding special payments before resuming supply.
  7. Inability to raise further equity capital.
  8. Creditors unpaid outside trading terms.
  9. Issuing of post-dated cheques.
  10. Dishonoured cheques
  11. Special arrangements with selected creditors.
  12. Solicitors’ letters, summons, judgments or warrants issued against the company.
  13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
  14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.

 

The above indicators of insolvency are not conclusive of insolvency individually, but rather should be used as building blocks to evaluate the financial position of the company at any particular time.

We have therefore have created a checklist for the director’s to include as part of their reviews of their Company’s performance.

It is suggested that if any three or more of the above are occurring within your business then you should seek specialist advice to avoid corporate insolvency and protecting yourself from personal liability.

Corporate Lifeline is ready to assist you and can provide free advice on how to improve your Company’s performance.  Contact link

Checklist Of Insolvency Indicators

  1. Continuing losses
  2. Liquidity ratios below 1
  3. Overdue Commonwealth and State taxes
  4. Poor relationship with present Bank, including inability to borrow further funds.
  5. No access to alternative finance.
  6. Suppliers placing Company on COD, or otherwise demanding special payments before resuming supply.
  7. Inability to raise further equity capital.
  8. Creditors unpaid outside trading terms.
  9. Issuing of post-dated cheques.
  10. Dishonoured cheques.
  11. Special arrangements with selected creditors.
  12. Solicitors’ letters, summons, judgments or warrants issued against the company.
  13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
  14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.