Recognising the indicators of insolvency

At HLB Mann Judd Insolvency WA, we handle a high volume of corporate insolvency appointments every year and from many different industries, so we are very familiar with inheriting business insolvencies in varying states of distress and despair.

Having said that, there are a few common symptoms that are consistent amongst the matters we administer, particularly when it comes to liquidation work.

There are a number of generic indicators of insolvency that we look for when conducting our investigations that came out of a landmark insolvency legal case called ASIC v Plymin. The case helpfully directs us to look at determining date of insolvency from the perspective of a ‘cash flow test’, rather than simply examining the balance sheet.

The indicators are:

1. Continuing losses
2. Liquidity ratios below 1
3. Overdue Commonwealth and State taxes
4. Poor relationship with present bank or lender, including inability to borrow further funds
5. No access to alternative finance
6. Inability to raise further equity capital
7. Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply
8. Creditors unpaid outside trading terms
9. Issuing of post-dated cheques
10. Dishonoured cheques
11. Special arrangements with selected creditors
12. Solicitors’ letters, summonses, 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.

Human nature dictates that most directors would rather battle on despite mounting debts, more competition, lower margins and lot more risk, than face the music and ask for some help.

Too often we meet with directors and we say, ‘if only you had of come in to see us six months ago’, during times when, for example, the overdraft was operating within its limit, when the ATO was up to date, when your lease was due for renewal, or when you were yet to decide about taking on that long term, low margin, high risk contract to keep the cash rolling through the business.

By the time most people come to meet with us, the options to revitalise and restructure a business are virtually gone. The cash has dried up and the debts are too high to jump over. Or worse still, the director has exhausted all of their personal resources, and in addition to the business closing, the director ends up bankrupt personally too because of personal guarantees given to suppliers, landlords and finance companies.

Accountants need to recognise the indicators of financial distress in their clients early and take steps to reach out to us to talk about insolvency options. We would much rather act as the corporate doctor than the corporate undertaker. The sooner we can meet with people, the better – we can offer timely, accurate and customised guidance to directors, all within a confidential and understanding environment.