How Do You Determine If A Company Is Insolvent?

10 warning signs your client's business could be insolvent

In order to determine if a company is insolvent or not, you need to understand what insolvent means. Insolvent means the inability to pay back any remaining debts, whether it be personal or business debts. When you think a company has become insolvent, it does not mean it is the end of the world. Life does go on and the company can recover in some way.

A company can become insolvent for different reasons, but how can you determine if they are insolvent? To Be Insolvent or Not to be, that is the question on every declining company holders mind. The simple tips below can give you an insight on determining this issue. Stick with these tips and they won’t fail you.

10 warning signs your client’s business could be insolvent

What you should be asking yourself:

  • Is the company making a profit?

This may seem like a simple question but very rarely is it asked. A company may be (barely) paying their bills and employees but are they turning a profit? A company needs to be earning enough money to pay their employees, bills, lenders as well as gaining a profit.

  • Have any debt collectors or court orders papers been delivered?

Debt collectors can be ruthless but no one should mess with the law. If a company is having difficulty paying their debt or not responding to court orders, then they are in trouble.

  • Check their balance sheet

Does the business owe more money than they have or can pay? Some companies can have a bad month or quarter, but if a Insolvency Expert company owes more than they own, then they are heading towards insolvency.

  • Is cash flow a problem?

The company is barely paying the necessities but does not have any left over to pay their debts. Making regular payments is a good sign, but if a starts making late payments or stops paying their lenders that are not a good sign.

  • Do the company have a good support system?

Just like a family, having a good support system is a key factor in a company. A company should be on good terms with their bank, lenders, and employees. But if the banks keep declining the loan requests and the employees start quitting, then trouble is in the air. A good support system should be able to back up a in times of need, but if ties have been severed then it is time to face reality.

DCL Advisory has some of the best professionals working for them. You will receive optimal care and reassurance knowing that their top CPA Sydney professionals have at least 15 years’ experience in their fields. Hopefully reading these tips have helped you. So if you think that your may be insolvent, look into DCL Advisory on how to get the best help available.

DCL advisory has been providing strategic, operational and financial advice to Australian companies In extremely bad cases the experts can make the process of liquidation less painful for the business owners and the employees.

How to Rescue a Failing or Insolvent Business

If your company’s struggling, you’re probably awake at night turning things over in your mind. However, it’s important to remember that businesses can recover from difficulties, and it’s even possible to go from insolvent to wealthy, given the right advice.

What’s the Scale of the Problem?

The first thing to work out is the full extent of the situation. Every business has poor cash flow at one time or another, so that’s not necessarily something to worry about. However, if you can’t pay your debts on time, the company could be insolvent. That’s a much bigger issue as it affects how you can trade and what your priorities should be: insolvent companies must put their creditors first. You could be accused of wrongful trading and made personally liable for any debts the company owes if you are proven to have made the situation worse.
To assess the health of the company, you need to produce a cash flow forecast and have a good look at the accounts.

Cash Flow Forecast

A cash flow forecast is really useful as it allows you to predict whether the company will be making a net profit or loss at key points in the future. This will never be 100% accurate, but it’s a useful tool nonetheless. If there are significant shortfalls in revenue, that’s a sign you should try to generate more income and cut costs. For an insolvent company, though, this may not be enough. You will need to take more decisive action.

Insolvency Solutions

Even if your business is insolvent, it’s not the end of the world. There are a variety of strategies you can use for company turnaround. Some, like a Company Voluntary Arrangement (CVA), involve agreeing a payment schedule with creditors and reducing the amount of debt. Other solutions are more drastic and involve winding up the company altogether and transferring its assets to a new phoenix company. This is known as pre-pack administration. All these methods can help the business recover, but more importantly, generate wealth for you in the long term.

How to Choose

There are many options for the directors of insolvent companies, and it can be a confusing and stressful time. That’s why it’s important to seek impartial, expert advice. Business turnaround companies do this sort of thing every day, so you can be sure they’ll pick the best option. Things may look bleak now, but that doesn’t mean they always will be.

How do I Protect my Interest if One of my Debtors Becomes Insolvent?

If one of your debtors becomes insolvent and you do not have adequate protection in place, there is very little you can do to retrieve the money owed to you. Any attempts to recover monies owed to you at this point are futile. Outstanding debts get passed on to the liquidator, whose task it is to assess and distribute assets or any money available to qualifying creditors.

Here’s the deal:

In insolvency cases there are two types of creditors: secured and unsecured. A secured creditor is someone who has taken out security against the possibility of a customer becoming insolvent, such as a mortgage or insurance policy. An unsecured creditor is someone who has not made any provision for the possibility of insolvency.

Insolvency can occur for reasons that are relatively unpredictable and beyond your control, in circumstances where:

  • Your debtor is owed money but is unable to collect it from his customers
  • Your debtor is unable to manage financial restructuring of his company
  • Changes in trading regulations make it impossible for his business to operate effectively
  • Global economic changes create market instability
  • Natural disasters, acts of terrorism or other local phenomena make trading unfeasible

Insolvency can happen when one of your customers’ business partners collapses. The problem affects smaller companies with capital ratios of less than 20% more seriously, as they find themselves unable to bear the losses incurred and without the necessary cash flow to operate effectively.

You can protect your interests in advance by taking out a credit insurance policy against the likelihood that one of your debtors will default on payment. Trade credit insurance provides coverage against non-payment of debts and against the insolvency of your customers. The policy is designed to give security in cases of financial losses incurred in either situation to a level of indemnity agreed between you and the insurer at the time the policy is put into effect.

What’s the real story?

An Asia-Pacific survey by insurers Atradius in November 2012 found that approximately 30% of domestic and foreign invoices remained unpaid at the due date, with more than 5% defaulted on. The survey generated feedback from more than 1,600 businesses in Australia, China, Hong Kong, India, Indonesia, Japan, Singapore and Taiwan. Over half of those surveyed highlighted the need to check customers’ creditworthiness more often. The report concludes that in today’s unstable financial climate it is more important than ever for businesses to manage their trade credit risk effectively.

Credit insurance services offer a safety net for domestic and foreign customers alike through commercial risk insurance and export and political risk insurance. Insurers have the facilities to carry out customer profiling and to gather corporate intelligence that will provide early detection of default risks and help your business maintain financial stability. Credit insurance experts will work with you to provide adequate cover that meets the specific needs of your company, and will continue to monitor your customers throughout the life of the policy to keep you informed of developments that could adversely affect your business.

What Do Insolvency Practitioners Do?

An insolvency practitioner is often a qualified accountant who is licensed and authorized to provide an insolvency service to private individuals and companies throughout the country. These persons act on behalf of the insolvent company or individuals, handing their affairs and helping them complete the daunting and stressful insolvency process whatever it may be.

In order to be a licensed and approved insolvency practitioner the person must have passed their Joint Insolvency Examinatons (JIEB), as the entire process is monitored extensively to ensure all rules and regulations are met. The JIEB insolvency education process takes place in step form, each step must be completed to ensure the rules and required educational standards are complied with , before the next step is taken.

Once qualified the first job for any insolvency practitioner once appointed in liquidation is to work alongside the director, taking over control of the company, its finances and assets. The first step of any insolvent liquidation process is to sell all the assets as quickly as possible. Though bear in mind that liquidating a company can take the liquidator many months or even a year or more depending on the complexity and size.

With the assets sold, the insolvency practitioner acting as liquidator is then responsible for collecting all the money. From the minute the liquidation process starts, the company director gives complete control to the liquidator. It is their decision whether to close the doors or continue trading, this of course affects employees.

When it comes to liquidation, the main priority is to customers, creditors and employees.

With all the money collected, the liquidator has to go through each of the creditors’ claims, identifying if they are in fact true. This is a very detailed process, which involves going through all the accounts to verify each claim before any payments are made.

If the liquidator chose to close the doors, they will also have a number of employee claims, which may include unpaid wages and holiday pay. Employees will be paid before unsecured debts. With any liquidation all secured debts are paid first and then employees and unsecured debts are paid out.

From here the liquidator distributes all the relevant funds according to the insolvency rules and regulations and then they close the company. Once the debts are paid, where possible and paying due care to all the creditors, the company is removed from the Register and will cease trading for good.

As a company director, finding yourself in this situation can be exceptionally stressful and daunting. If you are a limited company, then the shareholders have to agree to the liquidation and they can appoint the insolvency practitioner of their choice. In the vent of compulsory liquidation, the creditors do have the ability to choose the liquidator of their choice. In both instances, the liquidator will follow the same process and ensure all the steps are carried out as per the required rules and regulations.

As a company director, it’s important to bear in mind that a liquidator focuses on the creditors and not on you, you may want to try and secure a company that will try and help you protect yourself during this process.

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