Many lawyers and accountants in the insolvency sphere are familiar with insolvent trading. Specifically what the insolvency indicators are, how to prove them and assist with either the recovery or defence of such a claim.
The Australian Securities & Investment Commission (“ASIC”) has spent significant time and effort trying to educate directors by providing guides explaining who a director is, their duties and expectations and consequences of insolvent trading.
Below is a series of indicators of when directors should seek help and why. The indicators are grouped as follows:
1. Financial statements indicators – information that is easily available in the businesses’ books and records;
2. Creditor relationship indicators – how the businesses’ relationship is with their creditors and financiers; and
3. Cash flow indicators – the ability or inability to pay debts when they are due.
Some indicators do fit into more than one of the above groups. This article will focus on parts of the financial statements.
The easiest warning signs are that there is an absence of a business plan, incomplete financial records or disorganised internal accounting procedures. Over the years I have often heard comments like I gave all my documents to the accountant to do or they charge too much.
Directors have a statutory obligation to keep financial records that correctly record and explain the transactions, the financial position and performance of their company. Having accurate financial records provides a director with the knowledge of how well the company’s is performing.
It is impossible to lodge proper business activity statements (“BAS’s”), PAYG summaries, FBT and company tax returns if you have inaccurate records. This is vitally important as now the Australian Taxation Office (“ATO”) and Office of State Revenue are pursuing directors personally and more aggressively in collecting outstanding taxes.
A company suffering losses could have additional cash flow if they lodge their BAS’s on time. The company would have more expenses than income and would therefore be entitled to receive a GST refund from the ATO allowing the ability to either trade on longer or consider winding up earlier.
Warning if a company does not have complying books and records a director can be deemed to have traded whilst insolvent and be personally liable for company debts in a liquidation.
This can be resolved by getting a good bookkeeper / accountant or both, whether internal or external.
Currently there are multiple cloud (online) accounting programs like Xero. Directors can engage bookkeepers remotely to do data entry, bank reconciliations, real-time monthly reporting like that can be provided by Vincents which allows directors to focus on the company’s operations.
Having a good bookkeeper has the added benefit that it should assist in reducing the time it takes for the tax accountant with other compliance matters such as company tax returns and reduce your overall annual accounting fees.
Now that the books and records and financial statements are sorted I will deal with other indicators in the next article.
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