Insolvency – it does not pay to ignore the warning signs!


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Insolvency – it does not pay to ignore the warning signs!

There are many reasons that can lead a business into financial difficulty at the best of times. With the challenges associated with COVID-19, such as isolations and shutdowns, this has been placing more and more businesses in this situation.

Whether a sole trader or a large corporation, “the inability to pay debts when they are due” or “having more liabilities than assets on the balance sheet” are situations that can creep up on the business and if left unattended, can lead to serious consequences, such as insolvency.

For this reason, it may be a useful time to refamiliarise yourselves with the early indicators of insolvency. This is not to inject fear, as this is the last thing that is needed right now, but to stress that if detected early, it will provide more options and may avoid the need for formal insolvency. It also highlights the need to reach out to the experts who can help assess the possible options and to find the right path forward.

What are the indicators of Insolvency?

• Deferred loans
• Accrued rent
• Statutory debts being settled late
• A pattern of trade creditors being paid outside of terms, or offering a part-settlement
• Unpaid employee superannuation
• Non-payment of insurance premiums
• Poor collection procedures, poor cash flow management, debt factoring
• Creditors taking legal action, loss of suppliers
• Erosion of profit margin
• Undercapitalisation, high gearing
• Overstating the value of debtors and/or stock; understating liabilities
• Taking on new business to fund existing work in progress
• Incomplete management information and/or badly kept accounting records
• Cashflow issues

With COVID lockdowns and attendant issues, most businesses have built up a high degree of outstanding creditors. With insolvent trading laws still in force director’s responsibilities remain.

Director’s Responsibilities

What to do if Insolvency is suspected

If insolvency is suspected, it is very important that a company arranges to have cash flows completed to determine the liquidity of the business. If the problems appear to be temporary, solutions such as capital injection may be appropriate. However, if the problems appear to be long-term, the Director/s should consider appointing a Liquidator or Voluntary Administrator.

Voluntary Administration

This is a useful tool to assist the rehabilitation and reconstruction of a business. Voluntary Administration provides immediate benefit, in that it prevents the winding up of the company by creditors and provides time to develop a recovery plan for the business. Under this situation, the Administrators assume full responsibility for the operations of the business. They also investigate the books and records, contracts, and other commercial considerations.  The primary aim of Voluntary Administration is to allow the company to continue trading.  This period of operation and investigation enables them to determine whether the best possible outcome would be to continue trading in order to restructure.  If this is not possible, then to see if the business is saleable and to find a buyer for the business as a going concern and if all else fails, to liquidate the assets.

Act Now

If your business is in financial difficulty, you need to act quickly. If Directors continue to trade while insolvent, they are exposed to liability for civil and criminal penalties.

It is essential to establish whether a potentially insolvent business can develop the cash flow and other conditions that will support future profitable and cashflow positive trade. Acknowledging problems quickly is a positive step because it creates additional potential for expert solutions like restructure and refinance to save not only the business itself, but the futures of key people associated with it.

COVID has created a unique trading environment which has led to not only financial distress, but also emotional distress.  The best way to help arrest these pressures is to talk to people who have experience in dealing with such issues.

The dVT Group can provide experienced and professional advice on securing the best possible outcome for the particular circumstances. The potential to avoid business failure or mitigate its effects is increased, the earlier advice is sought. We offer years of specialised reconstruction and insolvency experience and look forward to the challenge and responsibility of putting those skills in your service.

Really, this is your opportunity to revisit the reasons you want to continue in your business in its current format. COVID has not been your fault but has presented you with a once-in-a-generation opportunity to review and reassess and determine your path forward.

Should you wish to have a confidential discussion with one of our expert insolvency accountants about a particular situation, contact Riad Tayeh on 02 9633 3333 or mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations and insolvency (both corporate and personal).