The post Christmas period is a notoriously difficult time for many small businesses. The excesses of the festive season are compounded not only by customers with their hands in their pockets but December’s production was cut short by holidays and Christmas party hangovers. Sadly, for some businesses those difficulties can be precursors to total failure – insolvency.
The legal definition of an insolvent company is, somewhat perversely, a company that is not solvent (only lawyers could come up with that Alice in Wonderland artifice). However, don’t panic! While this may seem another example of where the law disappears up it’s own backside, simply put, a company is insolvent if it is unable to pay its debts as and when they fall due. And while the pointers to solvency are sparse (perhaps due to their obvious nature), there are many indicators of whether a company is insolvent. Here are but 5.
Consistent failure to pay taxes, Federal or State, often reflect real cash flow difficulties. Ignoring what is often your largest creditor outside the banks is not a wise thing to do at the best of times. It may not be uncommon for a business to be behind in its payments, or to enter into arrangements from time to time (and the ATO often facilitates this). However, consistent arrears of significant amounts, failure to meet payment arrangements and regular demands or threats of legal action from the Commissioner are strong indicators of insolvency.
Much like taxes, a business that fails to meet its superannuation obligations to its staff, absent good non cash related reasons, is often insolvent or verging thereon. It is not difficult to hide arrears of superannuation from the ultimate beneficiaries (your staff) given that they are usually unable to access their superannuation when it is paid. Receipt of superannuation is rarely considered on payday by the average employee. As such, when cash is tight, super is one of the first on the ‘let’s make it up next month’ list. It is very rarely ever ‘made up’ and personal liability can also accrue to directors where the liability is one of a company employer.
If terms of credit from your suppliers have been limited or frozen, this is often due to a consistent failure to honour agreed terms of trade. Now while this can sometimes be put down to a simple dispute or even misunderstanding over a single transaction, it is more regularly due to a failure to keep accounts up to date and pay outstanding balances within the agreed terms (or at least industry accepted terms). Consistent failure to honour terms of credit, payment well outside industry norms or what has historically been the case in the relationship with the creditor, if coupled with increasing threats of recovery action, are all red light indicators of insolvency. This is particularly so if the situation exists with multiple creditors and or suppliers.
POST DATED CHEQUES
Using a post-dated cheque for a past debt is a well accepted sign of insolvency. How many solvent businesses issue post dated cheques? To paraphrase the classic line from Top Gun, ‘your wishful thinking is writing cheques, your business can’t cash’. A post dated cheque is often used to buy further time and additional credit or services. There are many other ways of doing so and if your business is resorting to post dated cheques to gain some breathing space from creditors, there’s a good possibility the cash flow situation is one of ‘not solvent’.
LETTERS OF DEMAND, SUMMONS etc
One strongly worded letter from a solicitor is not, of itself, much of an indicator of insolvency in most cases. Consistent or numerous demands, in respect of debts to which there is no real or genuine dispute, are another story altogether. Such regular demands are a high indicator of an inability to meet debts as and when they are due. That creditors have resorted to the expense of legal assistance only adds to the view that such debts have been outstanding for some time. Definite trouble ahead.
WHAT TO DO
Solvency is a cash flow issue. A business can be highly profitable or hold a significant asset surplus and still be insolvent (remember Ansett Airlines or Lehman Brothers). It is also rare that a small business is not technically insolvent at least some time, particularly in its formative years. However, a situation involving consistent unrelenting symptoms, and without recourse to viable, speedy options for satisfying creditors such as additional finance or working capital, is one that requires immediate attention. The earlier the action, the better the chances of survival.
It is more common than not that a business suffering these, or many of the other insolvency symptoms chooses to play the ostrich. This will only guarantee that control of the process, and the result, is taken out of the hands of the business owner. Even if a business is beyond saviour, there are still many things that can be done by expert legal advisors to mitigate the fall out.
If your business is suffering from any of the above symptoms of insolvency, get advice now. It may be nothing, but then it may also be something. Sajen legal specialises in insolvency and bankruptcy. If your business is suffering any or all of the above symptoms, call us now for a consultation.