Worried you’re trading insolvent? Here’s what to look out for

In 2003, the Victorian Supreme Court considered the case of ASIC v Plymin, Elliot & Harrison [2003] VSC 123, in which it was found that a number of companies had traded whilst insolvent. As a result, the associated directors were liable to compensate the creditors $1.4 million for debts incurred in the insolvent period.

The case has subsequently been relied upon to identify instances of corporate insolvency, after the court outlined 14 factors likely to indicate insolvent trading. These indicators include:

  1. Continuing Losses
  2. Liquidity ratios below 1
  3. Overdue Commonwealth and State taxes
  4. Poor relationship with present bank, including inability to borrow further funds
  5. No access to alternative finance
  6. Inability to raise further equity capital
  7. Suppliers placing company on COD, or otherwise demanding special payments before resuming
  8. Creditors unpaid outside trading terms
  9. Issuing of post-dated cheques
  10. Dishonoured cheques
  11. Special arrangements with selected creditors
  12. Solicitors’ letter, summonses, judgements or warrants issued against the company
  13. Payments to creditors of rounded sums which are not reconcilable to specific invoices
  14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts

Although this has now become the standard list of indicators used by liquidators to justify assertions of insolvency, it is important to remember that they remain indicators only. As such, a court will ultimately make a finding of insolvency ‘on the facts’. Accordingly, the indicators alone cannot be relied upon as a fail-safe template and liquidators may need to provide further evidence to support an allegation of insolvent trading.

I am here to help

If you have answered yes to any of the above indicator’s your company may be insolvent. Please do not hesitate to contact me so that we can work together to identify your legal position, safeguard the longevity of your business and recover debt from your debtors.

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Wiebke Herrmann is a Director at James Conomos Lawyers where she practices in the areas of insolvency, bankruptcy and commercial litigation. If you or your business needs assistance navigating a legal dispute, please do not hesitate to contact her. 
3004 8214 |    |  wiebke@jcl.com.au