Distressed & Insolvency Checklist
A company is insolvent if it is unable able to pay all its debts, as and when they become due and payable. The determination of whether a company is insolvent is often a complex matter.
The courts have held that concept of insolvency is to be ascertained from a proper consideration of the company’s financial position in its entirety, based on commercial reality. The test of insolvency is a cash flow test and not a balance sheet test of whether liabilities exceed assets.
The following checklist identifies some of the common signs that a company is financially distressed and may be insolvent:
- Creditors being paid outside their trading terms.
- Failure to pay GST and PAYG withholding to the ATO when due.
- Failure to make employer superannuation contributions when due.
- Failure to pay payroll tax when due.
- Entering into arrangements to pay creditors by instalments (including the ATO).
- Suppliers delivering only on COD terms.
- Defaulting on lease or rental payments.
- Failure to pay workers compensation insurance premiums.
- Defaulting on loan or interest payments to financiers.
- Cheques being dishonoured.
- Issuing of post-dated cheques to creditors.
- Withholding of payments due to reaching limit of bank overdraft.
- Receipt of lawyer’s letter of demand, statutory demand under Corporations Act 2001, writs or summons to recover overdue debts.
- Judgments being entered against the company to recover overdue debts.
Where a company has one or more of the above signs of distress and insolvency, the directors should immediately contact Quigley & Co for advice on the company’s financial position with a view to long term business survival. The failure to act quickly may result in personal liability for the company’s debts.
Initial consultations (which can total up to 3 hours) are conducted on a no cost basis.