The demise of a company can catch any director off guard – especially if you run an established business and are no stranger to dealing with cash flow ups and downs. But regardless of whether your business is in its fragile infancy or has been around for decades, the prospect of liquidation is equally frightening.
Getting a business off the ground is no easy feat, and keeping it running smoothly can feel like a battle at the best of times. So if you’re also strapped for cash and deep in debt, it’s likely you’ve been going through a very rough time.
With constant negotiations to calm creditors and the weight of the world on your shoulders as you worry about what the future holds, you may feel completely out of control and paralysed by indecision. But the fact is, your company must stop trading if it is insolvent. If it doesn’t, you put yourself at great personal financial risk which could lead to personal insolvency (bankruptcy).
If you’re unsure if your company is insolvent, it’s important to have an expert accountant evaluate it for you.
The faster you act, the less chance there is for a creditor to petition a court for your company to be liquidated – which they can do if the company owes them more than $2,000.
There may be something you can do to save your company. Or, you may wish to have a say in who is appointed as liquidator. But this may not be possible if a creditor forces liquidation first.
If your company is dealing with any of these five signs, it’s time to get advice now so you can take control and make some important decisions…
1. There's not enough cash to pay debts
A solvent company can pay its debts when they are due. It may struggle through brief periods of low cash flow, and even need to ask for extensions on loan repayments or sell assets to boost cash reserves.
But if all of the following apply, it’s a definite sign of insolvency:
- No cash
- Already on payment plans with creditors
- Can’t trade if it sells remaining assets
- Can’t find a buyer for remaining assets
If your company has negative cash flow and you’re not sure how it will recover, seek advice now.
2. You’ve exhausted all avenues to raise funds
In the start-up phase, raising capital can feel like an everyday part of business life.
You may invest your personal money, and seek loans or investment from family, friends, financial institutions, or venture capitalists. Because the company is still at grassroots, it’s easier to convince others of its potential.
But if the company does not perform and goes into debt without a practical “return to green” plan, it’s unlikely you’ll find people who are beating down your door to invest.
If your business is in debt and you’ve exhausted every known avenue to raise funds, speak to an expert. You may even discover potential avenues you hadn’t thought of, or see opportunities to restructure that could free up some capital.
3. You don’t pay yourself
One of the first signs we see of a company in trouble is when the directors stop paying themselves. Hoping to free up some cash, they sacrifice their own financial safety to pay company bills and wages.
And while this may make sense for short periods of financial strain, it’s time to ask for help if you work in the company and haven’t paid yourself for months.
4. You’re unsure how you’ll keep paying employees
This can be one of the most stressful signs of insolvency, and something that may keep you up at night.
It’s not pleasant to think about letting go of employees who you value. But if you can’t pay them, it’s best to give as much notice as possible.
Directors can also be held personally liable for outstanding superannuation amounts. If this applies to you (or may apply if the situation continues), get advice now.
5. You have outstanding tax debt
The ATO is a creditor just like any other, and can petition for liquidation if your company fails to meet its PAYG or GST payment obligations. Short term payment plans are OK, but if you break a payment plan and have no idea how you will meet upcoming repayments, the company may already be insolvent.
Find out sooner rather than later, so you can mitigate the risk to your personal finances.
Get expert help now
While these signs are the most common, there are many others that could indicate your company is insolvent and voluntary liquidation may be the right option.
At RSM, our team comprises restructuring and recovery experts, business advisors, and registered liquidators. We offer practical and honest advice, and a free initial assessment so you know where you stand and can make confident decisions about your next course of action.
If you decide voluntary liquidation is the next best step, we can guide you through the process to make it as pain-free as possible – so you can regain control of your life and start planning for a bright new future.
Book a free consultation now. Contact your local RSM office.