When does the writing on the wall start?
Advisors, in conjunction with their clients, should consider a range of factors to determine whether a company is facing an insolvency challenge and needs appropriate advice, from qualified specialists. When getting qualified advice, it helps to know that in a moment of uncertainty, Worrells offers complimentary consultations to give unbiased advice and solutions.
So, when must directors and their advisors consult an insolvency practitioner? The definition dictates: When a company is unable to pay its debts as and when they are due and payable—it is insolvent. It may be a simple equation that relates to one insurmountable debt against very little cash flow (on hand or soon to be in hand), or it may take a range of equations that builds the picture of insolvency.
However, before it gets to this point, we see three areas that can lead advisors to see the indicators, aka “the writing on the wall” before the formula above is applied:
- Product—i.e. what the company produces
- People—i.e. how the people in the business are behaving
- Partners—i.e. how external people (like its creditors and the banks needed to run the business) are responding to the business.
Regardless of what the business is, it produces something and needs assets to support its production. The product can be a service, a tangible product, or a way for something to be purchased. Looking at the products in the business and the business’s product gives an indication:
- Product is turning over slowly and against the positive trend set when times were great.
- Assets cannot be sold at short notice to meet debts owed, without affecting trade ability and profitably.
How people are behaving in the business gives some clues, as to the business’s environment—all which is available in regular dialogue with your client:
- Directors and their relatives are considering funding (or continuing to fund) losses.
- People in key roles resign.
- People are following a deficient or non-existent business plan and/or budget.
- Financial people/directors can’t easily state what the financial position is.
- Financial people/directors can’t produce accurate financial information to meet banking/ third party reporting obligations.
- Financial people/directors have exhausted funding facilities and/or taking agreements into default territory.
How external people are reacting to the business environment gives big indications of whether a state of insolvency is imminent. For example:
- Creditors are not being paid within credit terms.
- Creditors receive random round dollar payments that aren’t invoiced that way.
- Creditors are trying to regain control by making goods payable on delivery, in cash.
- The ATO is experiencing a resistance to lodging or paying PAYG, GST, superannuation obligations.
- Lawyers are sending correspondence that speaks of legal action.
- Creditor are having to agree to repayment arrangements—the ATO in particular.
Whether you uncover these insolvency indicators on behalf of your client or respond to their pleas for solace and guidance, a thorough assessment by qualified specialists such as Worrells is needed to determine whether the company has a short-term liquidity shortage, or whether it is insolvent.