As we head into the last month of the 2026 financial year, accountants and tax advisors will be preparing year-end statutory accounts and reviewing their clients’ tax affairs.
For a number of companies under financial pressure, this process often becomes the first real point where underlying insolvency indicators become apparent.
For advisors, EOFY presents an important opportunity not only to identify financial distress but also to consider restructuring options and head off a crisis in a timely manner.
The warning signs hidden in EOFY financials
It is not uncommon for financially distressed businesses to continue trading for extended periods while masking financial distress. EOFY reporting frequently exposes these pressures for the first time.
Some of the key indicators advisors should be looking out for include:
Increasing ATO liabilities, as well as outstanding BAS and SGC lodgements;
Working capital deficiency (current liabilities exceeding current assets);
Director debit loan accounts that continue to increase year on year, with little prospect of repayment or insufficient profits to flush them out;
Reliance on extended creditor terms or payment arrangements to sustain operations;
Aged or unrecoverable debtors, obsolete stock holdings or non-recoverable work-in-progress balances;
Ongoing trading losses despite reported revenue growth; and
Businesses surviving purely through director loans or external borrowings.
While any one of these issues in isolation may not indicate insolvency, collectively they often point towards a business in financial crisis.
Importantly, the end of the financial year is also a time for reflection for directors who may be exposed to increased personal risk without fully appreciating the consequences.
Director loan accounts and personal exposure
One of the most common issues arising in distressed businesses is the treatment of director debit loan accounts.
In circumstances where directors have withdrawn funds from a company, those transactions are often recorded through director debit loan accounts, including arrangements captured under Division 7A. In an insolvency scenario, those loan account balances generally constitute assets of the company and may be pursued for recovery by a liquidator following the company entering external administration or liquidation. Of equal importance is the treatment of director credit loan accounts. These balances can arise in a variety of ways, including where directors have advanced personal funds to the company, where dividends have been declared but remain unpaid, or where other director entitlements have accrued but not yet been satisfied.
In many cases, director credit loan accounts are reflected on the balance sheet as unsecured loans. In a liquidation scenario, this generally results in those claims ranking equally alongside other unsecured creditors. As part of broader asset protection and restructuring discussions, accountants should encourage directors to consider whether those advances ought to be formally secured. This will typically involve engaging solicitors to prepare appropriate security documentation, such as a Security Agreement, together with registering and perfecting the security interest on the Personal Property Securities Register (PPSR).
Ideally, security over funds advanced by a director to a company should be implemented either prior to or contemporaneously with the advance of those funds. Where an existing unsecured director loan is subsequently secured at a time when the company may already be insolvent or approaching insolvency, the granting of that security interest may later be subject to challenge by a liquidator.
Accordingly, advisors should carefully consider both the timing and circumstances surrounding any security arrangements. Security interests granted during periods of financial distress, or shortly before the appointment of an external administrator, are likely to attract heightened scrutiny and may ultimately be set aside if found to unfairly improve the director’s position relative to other creditors.
Finally, attempts to “tidy up” loan accounts at year’s end without a proper commercial basis or supporting documentation can create additional risks rather than solve them. Transactions recorded retrospectively, journal adjustments processed after the fact, or the reclassification of drawings as wages or dividends without proper consideration may attract significant scrutiny in the event of a future insolvency appointment.
Asset protection requires early planning
EOFY is also a good time for advisors to revisit any asset protection structures with clients.
Importantly, effective asset protection is not about “moving the assets before liquidation”. Transactions entered into when a company is insolvent, or likely to become insolvent, or becomes insolvent as a result of the transaction, may later be challenged under the voidable transaction provisions of the Corporations Act 2001 (Cth) or the Bankruptcy Act 1966 (Cth).
Instead, advisors should be encouraging clients to focus on legitimate forward planning strategies, including:
Reviewing ownership structures for key assets.
Ensuring trust structures are properly administered.
Formalising related party arrangements.
Documenting loans and security interests correctly.
Reviewing PPSR registrations.
Ensuring director guarantees are understood and managed.
Assessing whether existing structures remain appropriate for the current risk profile of the business.
Where restructuring or insolvency risks already exist, obtaining early advice is critical. Delayed action often results in significantly fewer options being available to directors and stakeholders.
Importance of early intervention
The current economic environment continues to place pressure on businesses across numerous sectors. Rising operating costs, ongoing ATO recovery action, and tighter lending conditions are all contributing to increased insolvency risk.
For accountants and other advisors, EOFY should not simply be viewed as a compliance exercise. It is often an ideal opportunity to identify any indicators of insolvency as well as review directors’ exposure in the event the company was placed into liquidation.
Early intervention provides an opportunity to explore restructuring strategies and implement appropriate protective measures for directors and stakeholders alike.
The Principals at Worrells are available to assist advisors and their clients in navigating these issues and considering the options available.
