by Gavin King CA

A Company becomes insolvent when it is unable to repay its debts as and when they fall due. The Corporations Act 2001 provides that the Director(s) of a Company have the responsibility or obligation not to trade the business of the Company if the Company is Insolvent. This is when a Director(s) need to consider the options they have available to them.

It is clear that any Director(s) should try and avoid a Company becoming insolvent, but how can they do that and if possible, avoid the need to see an Insolvency Practitioner?

1.    Maintain Cash Flow

One of the most famous old sayings in the accounting world is: “Revenue is vanity, cash flow is sanity, but cash is king”. This basically means that although it is important to generate revenue and make a profit, the quantum of real cash flow coming into the business in excess of the cash going out of it is even more important. As appealing as it looks to have a high revenue record on the Company’s financial statements, the real cash flows in most cases are the ones that keep the business afloat.

2.    Make Profits

For all the obvious reasons, none of us would design a business that incurs more costs than profit. However, one should note that this is the most, although not the only, important base of a financially strong entity. Making profits creates the ability for a Company to meet its obligations when they fall due.

3.    Restructure

Notwithstanding the above, one would agree that it doesn’t always turn out to be as easy as it would have been planned to avoid insolvency especially when there are significant external factors that one would not have thought could impact the business. In more unfavourable instances, it is crucial to take some time to consider the main reason why the business plan did not work and what you might change or if in the fullness of time, the business simply could not work. The Director(s) would need to consider their approach to the delivery of the Company’s products and/or services, the financing options taken, or one of many other factors. In instances where those factors exist, restructuring the business may be an option to be considered. The idea behind business restructuring, which may be organisational, debt or financial restructuring, is to make the business of the Company more profitable or better organised to meet its present and future needs.

4.    Explore your Options

In the day-to-day management of a business, the Director(s) make the decisions by considering the pros and cons in regard to which steps to take, which offers to make, or which contract(s) to execute. Each decision will affect the business in different ways – some may have limited impact, some may make a significant impact, some will be positive and some will be negative. It may be impossible to predict what the most appropriate decisions should be. After all, making crucial decisions in any business is not as easy as flipping a coin, especially when preliminary insolvency signs are indicated.

Most people are not comfortable talking about insolvency. This is only natural as it would be admitting to some sort of potential failure on their behalf. However, early action and identification of the preliminary signs of insolvency are the most appropriate signs to start looking for help. For many businesses, especially small businesses, consulting with experts such as Lawyers or Accountants is not the most preferred option due to the costs and time it incurs. However, it is noteworthy that at the end of the day, those costs incurred in gaining expert advice in areas that the Director(s) may not be familiar with would most likely lead to a more positive outcome for any business. How quickly insolvency signs are detected significantly affects the extent to which a business can be guided down the path to continue is a growing concern.

It is our view that early intervention is always the best intervention, and getting the best advice you can will aid, if not ensure, the prevention of potentially bigger issues that may occur. Ultimately, we would rather see you through the troubles and avoid a formal insolvency appointment.

Gavin is an Associate and the Director of Insolvency at Condon Advisory Group. He is a Registered Trustee and Liquidator, and has over 15 years of experience in all aspects of Personal and Corporate Insolvency.