A Lifeline Thrown to Directors of an Insolvent Company
The inability of a company to pay their debt because of cash flow problems and whose books are in arrears are the first insolvency indicators for outsiders looking. Cash flow problems can deepen and can make a business actually go beyond the point of meeting its liabilities. Basically, if your business has insufficient assets to cover all its liabilities, it can safely be regarded as insolvent. This is devastating and The Australian Securities and Investments Commission (ASIC) is constantly revealing statistics showing companies which are going into insolvent administration, more so with the Australian economy having taken a downturn since 2011.
Damage is done to those businesses which go into administration, particularly because with termination of company contracts, it becomes time consuming and difficult for a company to be returned to solvency. Wrongful trading is a serious offense, and as a director you may well need to enlist the help of a licensed insolvency practice if you believe you may be in breach of the Insolvency Act. A sure insolvency indicator is when a creditor may event get a Court Judgement against the business, resulting in the court investigating the company’s finances to see if it is indeed insolvent. The creditor may even petition the Court to order a business into liquidation.
Identifying Problems to Restore Profitability
Left unattended, the personal consequences of insolvency for directors will just continue to get worse. All is not lost however, because even though there are a number of indicators of potential insolvency, there are steps to be taken which can guide a business away from going under, if they are identified early enough by a professional business management expert. Some of these indicators of when a director should be looking for professional advice and assistance are –
- overdue tax remittances
- ongoing losses
- no access to alternate finance; an inability to raise additional money to stay solvent. Bank overdrafts for instance can also provide some insight into the business’ cash flow health. If a business is continuously trading with its bank account close to the overdraft limit, it could well be an indication that the cash flow is in trouble
- a poor relationship with the bank will simply mean limited options for the company who relies on the bank as their source of new funding
- a company which offers a post-dated check, and one that is dishonoured is a sure indication of a company having insufficient funds to pay debt
- sums of money paid in small and rounded amounts which aren’t reconcilable to the amounts which appear on certain invoices. This is often an indication that a debtor wants to resolve the situation and that the creditor will be satisfied with small payments as opposed to nothing
- financial information which isn’t accurate and which isn’t consistent is a reliable indicator that the company’s trading performance and financial position are not being maintained
- suppliers who demand COD because they don’t believe a company has the means to pay its debts
- neglected, run-down premises are typical of a business in trouble as well as the aura around the staff who may realize that with the departure of key management staff; they are next in line
One, two or three indicators should cause alarm bells, while four or more are a strong indication that your company is indeed insolvent.
The Director is Held Responsible for Company Losses
Australian law surrounding directors is that a director has an obligation to ensure the business is prevented from incurring debts while the company is insolvent, and in fact failing to do this can actually result in the director being held personally liable for losses which creditors will suffer because of the liquidation. This duty placed on the shoulders of the director can result in uncertainty and risk for directors, and unless they have a case based on the fact that they can keep the company solvent, they will opt to place the company into administration to down-scale their personal exposure.
For any director, administration can be fraught with complexities. It would be far better to avoid liquidation and for the director not to resign but to rather implement an insolvency process. As a director you also shouldn’t arrange for additional credit or accept orders when the business won’t be able to pay. Now is not the time to withholding tax. Doing this may preserve cash for now, but the debt with interest will inevitably have to be paid. It also won’t help to ignore the evidence of insolvency like the warning letters from creditors. Steps you can take will be to, among others –
- ensure minutes of board meetings are kept to demonstrate the correct actions of the board
- continue keeping up to date records of the company’s assets and liabilities
- act immediately; discuss the problem with other directors and get advice from professionals – Restructuring Works keeps things totally confidential, providing discreet and sound advice to directors as well as practical support for companies in financial distress. There are many sites providing information on insolvency issues, but their focus is on assisting the one who needs to make the right decisions and steer the company back onto the straight and narrow. The website offers free advice and free call back from accredited and skilled professionals with answers which can steer a director in the right direction. Advice is free until a particular service or product is offered to the company after a thorough discussion with an expert advisor. The beauty of using a website like this is that you don’t have to read everything. The layout enables you to look up the topics that are causing you to stress on the menu. You will have your unique situation diagnosed before a solution is worked out which will ensure the least disruption for the business.
An Important Step in the Right Direction
An almost imperceptible flow of money usually manages to escape through our family budgets, but with the director of a company, every cent has to be accounted for to avoid the company becoming insolvent. When a director is feeling the pinch, he or she can pinch back by asking questions and getting advice from professionals. Restructuring Works is a reputable and reliable company who throw a lifeline to directors of companies who are in financial stress. As a director, if you don’t try to grab the lifeline with both hands you stand to lose money and respect.