6 Warning Signs Your Sydney Business May Be Insolvent and What to Do Next

Running a business in Sydney can be challenging, especially since financial issues can arise at any given time depending on the circumstances. However, financial distress does not suddenly occur. Financial distress develops over time, especially when businesses ignore early warning signs. Identifying these signs early allows directors to manage financial risk, pursue restructuring, and reduce insolvency risk.

Below are six critical warning signs of insolvency and what should be done to manage these risks.

What Are the Early Cash-Flow Signs That Indicate a Sydney Business May Be Insolvent?

Cash flow is the lifeblood of any business and often the first area where insolvency risk becomes apparent. A business may be insolvent if it cannot pay its debts as and when they fall due, even if they appear profitable. As shown in ASIC v Plymin, Elliot & Harrison [2003] VSC 123, early warning signs commonly include:

• Continuing losses
• Poor relationship with present Bank, including the inability to borrow further funds
• No access to alternative finance
• Overdue Commonwealth and State taxes

Another key indicator is a liquidity ratio below 1, where current liabilities exceed current assets. This suggests the business lacks sufficient short-term resources to meet its obligations. If a business experiences ongoing cash-flow problems as opposed to temporary illiquidity, this may indicate insolvency. In such circumstances, directors should assess solvency and consider whether early restructuring options may save the business.

How Do Unpaid Debts, Tax Arrears or ATO Pressure Signal Insolvency Risk?

Unpaid debts and tax arrears are strong indicators that a business is under financial distress. Many businesses delay tax payments to manage cash flow. However, when these tax liabilities accumulate, they may reflect insolvency. Common warning signs include:

• Outstanding BAS, GST, or PAYG withholding
• Unpaid superannuation contributions
• Missed ATO payment arrangements
• Increasing correspondence, demands, or enforcement action

Unpaid superannuation is particularly serious, as it can expose directors to personal liability. Continuing to trade while tax obligations remain unpaid may indicate insolvency, especially if the company is not shown to enter any payment arrangements to manage these debts. Early professional advice can help assess whether any obligations are not being fulfilled, manage negotiations, and determine whether restructuring or formal insolvency pathways should be considered.

Why Are Overdue Creditor Payments and Statutory Demands a Serious Red Flag?

Difficulty paying trade creditors is often one of the most visible signs of insolvency. If a company is unable to consistently pay creditors as debts fall due and payable, creditors may take action, including:

• Shortening payment terms
• Moving the business to cash-on-delivery
• Refusing further credit
• Issuing letters of demand

Statutory demands on the other hand can result in serious legal consequences. These demands are usually very strictly enforced, and failing to respond may trigger a presumption of insolvency. This may risk the company being wound up and liquidated through a court order. Once court action commences, directors automatically lose control of the company and their powers cease.

Overdue creditor payments and statutory demands should always be promptly dealt with and never ignored. Engaging in negotiations with creditors and considering early restructuring options can save your company from liquidation.

How Can Ongoing Trading Losses Expose Sydney Directors to Insolvent Trading Liability?

Ongoing trading losses are a common feature of insolvent companies. While short-term losses can occur during a company’s growth stage or unexpected market conditions, ongoing losses without any reasonable restructuring arrangements pose significant insolvent trading risks. Warning signs include:

• Monthly operating losses
• Declining profit margins
• Increasing debt to fund operations
• No clear pathway back to profitability

Directors have a duty to prevent the company from incurring further debts if there are reasonable grounds to suspect insolvency. Continuing to trade without taking proactive steps to relieve the company from financial distress can expose directors to personal liability for insolvent trading. If losses continue, directors should act swiftly to mitigate further financial harm by consider restructuring, cost reduction, or voluntary administration to avoid insolvent trading.

What Immediate Steps Can Sydney Business Owners Take to Reduce Legal and Financial Risk?

If warning signs of insolvency are present, directors must take immediate action. Directors should:

• Seek advice from a qualified professional to conduct a solvency review and understand available options
• Assess the financial position by reviewing cash flow forecasts, assets, and liabilities
• Engage with creditors early to negotiate payment arrangements where possible
• Consider restructuring options, including small business restructuring or voluntary administration
• Maintain accurate financial records to ensure any decisions made are based on accurate financial data.

Early action allows directors to consider options and significantly reduces the risk of personal liability.

We’re With You

Financial distress can be overwhelming, but you do not have to navigate it alone. At Chamberlains Law Firm, experienced insolvency lawyers work closely with Sydney business owners to provide clear, practical advice tailored to their circumstances.

If your business is showing signs of financial difficulty, acting early can make a meaningful difference.

Contact us today for a confidential consultation. We’re with you.