Company Directors Beware! 10 Signals Your Company Is Insolvent
As a director, you must stop your company from trading if it is unable to meet its debts. Otherwise, as a director, you could be sued personally by a liquidator or creditors (putting your own assets at risk) for the debts incurred whilst insolvent and even face criminal action.
A company is solvent if it can pay all its debts at the moment they are due for payment. The question which should be posed to ascertain whether a company is insolvent is this: Is the company able to pay all of its debts as and when they become due and payable?
The main determinant of a company’s solvency is based around the fact of whether debts are due and payable. Four factors should be taken into account as follows:
- all of the company’s debts (in order to determine when those debts were due and payable);
- all of the assets of the company (in order to determine the extent to which those assets are liquid or are realisable within a time frame that would allow each of the debts to be paid as and when they become payable);
- the company’s business (in order to determine its expected net cash flow from business by deducting from projected future sales the cash expenses which would be necessary to generate those sales); and
- arrangements between the company and prospective lenders such as its bankers and shareholders (in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a later time than the debts).
To contravene the law, a director must either be suspect the company is insolvent or a “reasonable person” in a like position in the company, in the company’s circumstances would suspect the company is insolvent.
A regular occurrence of a few of the following 10 events by your company should cause you to become suspicious:
- continuing financial losses;
- bills being paid outside supplier trading terms;
- tax liabilities not being paid;
- supply terms being changed to cash on delivery “COD” terms;
- increasingly receiving letters of demands, solicitors’ letters and legal demands;
- large number of customers not paying their accounts on time;
- no up to date and accurate financial information;
- company cheques being dishonoured;
- knock-backs on finance applications;
- excessive reliance on family members and friends.
If at any time you are concerned your company is trading insolvent, or is in danger of doing so, you must consider putting the company into administration or liquidation to avoid breaching the law and personal liability for company debts.
Want my view on your own situation?
Book an initial consultation: up to two hours with me by phone for a fixed fee of $1,650 (including GST), then a short written note of my advice and next steps. If my conflict check means I can't act, I'll refund your fee in full. To check anything first, email
info@klaw.com.auor call
(07) 3103 3199.
Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
What People Say
Book an initial consultation
An initial consultation is the best way for us to find out whether, and how, I can help. It suits business owners and directors facing a decision that matters. You get my considered view of your situation, not just a first impression.
The fee is a fixed $1,650 (including GST). It covers a phone consultation of up to two hours, plus up to one hour of my time to consider the material you send me beforehand and to prepare my written note afterwards. Here is how it works:
1. When you book, you tell me briefly what the matter is about and who else is involved, so I can carry out a conflict check and confirm I’m free to act. If I can’t act for you, I’ll refund your fee in full.
2. I tell you what information and documents I’d like to see, and I consider them before we speak.
3. We talk it through by phone. I give you my initial advice, the options I see and what I’d do in your shoes.
4. Afterwards, I send you a short written note of my advice and the next steps I recommend.
If I can help further, I’ll explain how. If I can’t, I’ll say so. You are under no obligation to engage me further. If your matter needs more than this, I’ll send you a proposal setting out how I can help and an estimate of my fees. No further work starts until you accept it.
I keep only a limited number of consultation times. If none suits you, or you’d like to check anything before booking, email info@klaw.com.au and I’ll do my best to accommodate you.