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Factors for creditors to consider that suggest a company is insolvent

Key points

  • Creditors should be aware if a company debtor is potential insolvent so that they can protect their position.
  • If a creditor becomes aware that there are signs that a company is insolvent, they should consider their position and how to continue dealing with that company.
  • During administration or liquidation if there are factors that suggest the company was insolvent, creditors may be able to pursue directors who allowed the company to continue trading.
debt recovery sign

Factors

The following list is a non-exhaustive list of factors that could indicate that a company is or was insolvent:

  • outstanding taxes & other unpaid statutory obligations
  • instalment arrangements with the ATO
  • the company having difficulties paying suppliers and third-parties
  • payments to other suppliers outside of normal terms
  • suppliers placing the company on stop supply
  • suppliers insisting on COD, or request for immediate part payment of a debt before resuming supply
  • circumstances involving bounced, dishonoured and post-dated cheques
  • knowledge of any other creditors threatening legal action against the company for late or non-payment
  • legal documents served on the company informing them of the insolvency
  • difficulty in paying the wages or salaries of staff
  • public information indicating any trouble with the company’s ability to pay creditors or staff
  • available information of any bank refusing the company or unwilling to extend further credit
  • report of any maxed out overdraft and credit cards
  • any indication that there was a poor relationship between the company and their present bank or financier including refusing to provide further debt
  • any information available that the company had no access to alternative finance
  • knowledge of any existing special arrangements with selected creditors (to show preference)
  • any payments made of rounded sums, which are not reconcilable to specific invoices.
  • any solicitors’ letters, summons, judgments or warrants that were issued and made public against the company
  • investigation of the ability of the company to produce timely and accurate financial information to display the company’s trading performance

Consequences

If any of these factors are currently present, any creditors should consider their position to ensure that they are not left with exposure in administrator or liquidation. Further creditors should ensure that if the company becomes insolvent and doesn’t pay its debts, will that affect the solvency of their business or company.

If the company is already in administration or liquidation, these factors may be used to establish the company was insolvent at a specific or earlier time. There are personal consequences for directors that allow a company to continue to trade whilst insolvent, which may increase the amount any creditors are paid.

If you are a creditor requiring advice on your rights or a company experiencing factors suggesting insolvency,  contact our insolvency lawyers today for a no-obligation discussion.

Daniel is a solicitor in our team with experience in litigation, conveyancing & property and wills & estates.

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DISCLAIMER

No part of these notes can be regarded as legal advice. Although all care has been taken in preparing all notes, readers must not alter their position or refrain from doing so in reliance on any of these notes. Stephen Wawn & Associates do not accept or undertake any duty of care to readers relating to any of these notes. All inquiries should be directed to Stephen Wawn & Associates.

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