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Key Indicators of Insolvency
A quick reference check list of insolvency warning signs
Directors have a duty to ensure that their company does not trade whilst insolvent. A key test of a company’s solvency is whether it will be able to pay all of its debts as and when they fall due (not overdue). There must be reasonable grounds to expect that funds will be available and within the appropriate time frame, e.g. from increased (net) revenue, asset sales, capital raising etc.
If the answer to one or more of these is ‘Yes’ it may be cause for concern and potentially insolvent trading.
Working capital deficient Ensuring current assets are at realisable value and not overstated
Incurrence of trading losses
How is the loss funded – delaying or non-payment of creditors, injection of share capital etc?
Demands/legal action by creditors e.g. overdue statements, collection agents, Statutory Demands
Non/late lodgement of GST and other taxation returns
SARS issues late/overdue notices against company
SARS issues Director Penalty Notice on Director’s home address, rendering director personally liable
Company has entered into repayment arrangement with SARS or other creditors
Statutory creditors not paid on time, e.g. PAYG, Superannuation, GST, payroll tax
Suppliers have stopped supply or insist on COD terms. Change of supplier? Why?
Creditors being paid in part payments (round sum payments, cheques drawn to cash, etc.)
Insurance premiums unpaid or insurance non-existent or inadequate
Default on bank facilities
Opening second or alternative bank account
Accounting records poor or non-existent – deemed insolvency?
Sale/assignment of debtors (factoring or book debt loan) to generate instant cash
External accountant’s fees in arrears
Unpaid rent on premises or overdue finance contracts
Post dating of cheques
Cheques being dishonoured
Bank overdraft being exceeded (or cheques being withheld or recorded as unpresented until funds become available)
Creditors outstanding beyond trading terms and increasing in value