What is Insolvency?

Insolvency is when an individual or corporate body is unable to pay their debts as and when they fall due. Though it can be applied to both individuals and corporate bodies, it usually refers to organisations. It is governed under the Corporations Act 2001 (Cth).


It is always important to be aware of the financial status of your company. If your company is insolvent or is likely to become insolvent and you fail to take immediate action, then you risk insolvent trading meaning that you may face several consequences such as criminal and civil penalties.


Signs that my company is insolvent


In order to eliminate the risk of trading whilst insolvent, there are warning signs that you should look out for:


Poor cash flow – If your cash outflow is greater than your inflow and you are not making money from your business, then it could be a sign that your company may likely become insolvent. Make sure that you maintain an accurate cash flow forecast so that you can monitor the financial status of your company and recognise the signs early.


Delayed superannuation payments – Are you beginning to fall behind on paying your employee’s superannuation contributions? One of the first payments that company directors delay when their company is becoming insolvent is superannuation. This is because these contributions are only made every few months so delayed payments are not usually noticeable until later.


Bounced cheques – A clear warning that your company is becoming insolvent is if your cheques are constantly bouncing. It illustrates that you do not have the sufficient funds to make certain payments when they fall due and indicates that this will also affect the future payments.


Now what you know what is insolvency, it is important to know how to recognise the warning signs so that you can avoid insolvent trading. If you believe that your company is insolvent then you need to take action immediately. Call Insolvency Services Australia on our 24/7 toll-free hotline – 1800 003 883.


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