It’s crunch time: don’t ignore insolvency warning signs

There are less than 50 days when several key stimulus measures come to an end and business owners are being urged to do a business health check now to identify any red flags. Directors could be liable if they don’t, warns business recovery and insolvency firm, Jirsch Sutherland.

31 December marks the end of the insolvent trading moratorium, temporary increase in the statutory demand threshold, the first tranche of JobKeeper 2.0 and, for some states, the commercial eviction moratorium. That means it’s ‘crunch time’, says Bradd Morelli, Jirsch Sutherland’s national managing partner.

“It’s vital that businesses don’t ignore the warning signs of insolvency, otherwise they could miss the window to take corrective action,” Morelli says.

“Not only that, but directors could also retrospectively be personally liable for insolvent trading―from when the temporary Covid-19 Safe Harbour changes to the Corporations Act came into play on 25 March this year.

“It’s crucial that business owners and directors understand that while it might not be their fault that their business is in trouble, it is their responsibility.”

ASIC encourages directors to seek advice early from a suitably qualified and independent adviser about their company’s financial affairs and the options available to manage the disruption caused by Covid-19.

 “Early intervention could mean the difference between turning a business around or going into liquidation,” adds Morelli.

“By recognising the signs your business is in trouble and acting on them early, you could give your business the best chance of survival or to wind it up with minimal losses and achieve the best possible outcome.

“Working with a business recovery/insolvency specialist also means that if you have been trading while insolvent, the matter will be handled in a controlled manner, mitigate risk and prevent against subsequent action once the insolvent trading moratorium ends.”

12 warning signs your business could be heading towards insolvency

•        Poor or no cash flow

•        Can’t pay your bills

•        Can’t pay staff wages or superannuation

•        Poor quality books or records

•        Net asset/(liability) position

•        Losing clients

•        Securing special payment arrangements with creditors

•        Disputes between business owners and directors

•        High staff turnover and lower competence

•        Substantial bad debt write-offs

•        Physical deterioration or poor appearance of your business premises

•        Inability to access finance

What to do when warning signs are identified:

•        Act quickly (before the insolvent trading moratorium ends)

•        Speak with your accountant or a business recovery/insolvency specialist

•        Meet with management

•        Identify the reasons for the warning signs

•        Review your financial position

•        Prepare a strategy to deal with the issues