Often, it is difficult to determine whether a company is insolvent or is at risk of becoming insolvent. The case of ASIC v Plymin, Elliott & Harrison [2003] VSC 123 assists in determining the commonly seen key indicators that a company is insolvent, or is on the road to corporate insolvency.
The indicators of insolvency may be used not only to demonstrate insolvency after the fact, but also can assist as guides for companies to take early action. Improving company finances and operations can also help to prevent more serious consequences for directors which can arise in a liquidation scenario, such as insolvent trading and breaches of director’s duties.
Key indicators of insolvency
ASIC v Plymin included the following key indicators of insolvency:
- Continuing losses.
- Overdue Commonwealth and State taxes.
- Liquidity ratios below 1.
- Poor relationship with present Bank, including inability to borrow further funds.
- No access to alternative finance.
- Inability to raise further equity capital.
- Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply.
- Creditors unpaid outside trading terms.
- Issuing of post-dated cheques.
- Dishonoured cheques.
- Special arrangements with selected creditors.
- Solicitors’ letters, summons[es], judgments or warrants issued against the company.
- Payments to creditors of rounded sums which are not reconcilable to specific invoices.
- Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.
A company should use the abovementioned indicators to monitor its performance and to determine whether or not urgent action must be taken to avoid insolvency. If insolvency is suspected, expert advice should be sought urgently on the options available in order to deal with the company’s financial issues and to safeguard against the consequences of a forced winding up.
