If you’ve ever wondered how companies can seemingly fold suddenly, we’re here to tell you about the warning signs that a company may be at risk of insolvency.
What is insolvency?
Insolvency is when your company is unable to pay its debts. Your company might be in financial difficulty if it has ongoing losses, poor cashflow, unpaid creditors outside usual trading terms and problems obtaining finance.
Ultimate Tax & Advisory Managing Director Bobby Serval said there are annual measures in place to hold businesses accountable for their financial situation.
“Each year company directors need to sign a solvency resolution that the company is solvent and able to pay its debts on time,” he said.
“The directors must have a reasonable basis for their opinion and the resolution must be passed by a majority. This is one measure that is useful for companies to take note of their business position and if they are close to insolvency.
“We encourage companies to stay on top of your bookkeeping and ATO obligations so you can see how your company is performing at all times. It is hard to tell how company is tracking if you don’t have accurate data.”
The solvency resolution occurs around the anniversary of the formation of the company. Your accountant will prepare the solvency resolution for company directors if they manage correspondence with the Australian Securities and Investments Commission (ASIC). If the directors look after ASIC themselves, they need to prepare the resolution themselves.
What are the signs of insolvency?
There are several signs to look for if you think your company may be close to insolvency. These signs include:
- overdue taxes and superannuation liabilities
- rent and other essential services unpaid or delayed
- incomplete financial records
- lack of cash-flow forecasts
- increasing debt
- problems selling stock or collecting outstanding sales invoice payments/debtors
- high turnover of key people
- solicitors’ letters, demands, summonses, judgements or warrants issued against your company
- suppliers placing your company on cash-on-delivery terms
- special arrangements with selected creditors (e.g. payments to creditors of rounded sums not reconcilable to specific invoices)
- overdraft limit reached or defaults on loan or interest payments
- change of lender or increased monitoring/involvement by financier
- inability to raise funds from shareholders
- board disputes, director resignations or loss of management personnel
- increased complaints from customers.
Bobby said a very serious warning sign was if you received a director penalty notice for your company’s unpaid and unreported Pay As You Go (PAYG) withholding or Superannuation Guarantee Charge (SGC) amounts.
“If you receive a PAYG or SGC director penalty notice you should immediately seek professional advice,” he said.
“Failure to take any action within 21 days could result in personal liability for the unpaid company tax and can have devastating consequences. Directors often think they are immune from their personal finances being affected by their companies actions, but this is simply not true when it comes to employee wages and super.”
What do you do now?
If you are concerned that your company is showing signs of insolvency, you need to contact your accountant ASAP to discuss your options. A creditor debt restructure, refinance or obtaining equity funding to recapitalise the company may be options.
If these are not possible, then you may need to appoint a registered liquidator to act as a liquidator or as a voluntary administrator.
If you don’t believe the company is solvent, do not sign the solvency resolution. You will need to pass a negative solvency resolution and additional ASIC forms will be required to be prepared. Please advise us so we can prepare these on your behalf.
Bobby said your accountant was the first point of call for insolvency.
“As accountants, we can help you look through your company finances,” he said.
“We also have a network of lawyers, administrators and liquidators we can refer you to if you require assistance beyond our specialties,” he said.
For more information read our factsheet, call us on 61443370 or email office@ultimate-tax.com.au
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