SOME OF THE WARNING SIGNS

1. Large debtors fail to pay

Debt collection processes must be commenced and it may become appropriate to appoint an administrator where the company is not actually insolvent but may become insolvent and in a situation where degradation of the cash flows is likely to bring the company to insolvency.

2. Running out of working capital with no means to raise more 

The appointment of an administrator can have the effect of stabilizing the company in that all creditors’ claims are frozen and thereafter possibly compromised whilst debtors are collected and other appropriate measures are taken.

3. Reduction in turnover

Generally speaking, only a drastic reduction in costs and freeing up capital can help return a business to profitability. The cost reduction must be rapid and effective without impacting upon the ability of the business to meet the reduced demand. Such reductions might include;

1. Laying off or outsourcing staff,
2. Moving to less expensive premises
3. Factoring receivables
4. A sale of assets surplus to requirements can free up much needed working capital

4. Three consecutive months of losses corresponding with an increase in creditors and reduction in debtors

The appointment of an administrator can have the effect of stabilizing the company in that all creditors’ claims are frozen and thereafter possibly compromised whilst debtors are collected and other appropriate measures are taken.

5. Directors Penalty Notice

If a company hasn’t lodged the company’s Business Activity Statement within 3 months of the due date for lodgment the directors will become personally liable for the tax debt (PAYG and Super Guarantee Charge). This liability can no longer be discharged by winding up the company or appointing an administrator.

6. Statutory demand for payment issued to a company

If a company hasn’t complied with the demand within 21 days by;

1. Either making payment or
2. Applying to the court to have the demand set aside

The company will be deemed to be insolvent and may be wound up on that account.

7. A Tax office garnishee order against the company’s bank account

Being a mechanism which the ATO has at its disposal for collection of unpaid taxes

If tax is not paid and that Bank account is the repository of the working capital of the company a garnishee order may result all cash being transferred ti the ATO.

Once again the appointment of an administrator can have the effect of stabilizing the company in that all creditors’ claims are frozen and thereafter possibly compromised whilst debtors are collected and other appropriate measures are taken.

Charging clauses

If you have signed purchase orders in respect of orders from suppliers which purport to create a charge over the company’s assets to secure payment for the supply – often called retention of title clause – the supplier can register its interest against the company on the Personal Property Securities Register,

1. This gives the supplier powerful means of recovery in the case of a Liquidation
2. As the register is publicaly available information can work against the business when seeking finance.

8. Litigation which the business cannot afford

There are situations where it is appropriate to appoint an administrator where that company is not actually insolvent but may become insolvent such where litigation is likely to bring the company to the brink, such an appointment has the effect of staying/freezing the litigation after which the genuineness or otherwise of the claim is dealt with by the administrator administratively, at vastly less cost.

9. Director Disputes Leaving Business Unmanageable

The appointment of an administrator can have the effect of stabilizing the management of the company.   Generally speaking, if none of the options referred to return the business to stability, the directors should look at either selling the business or closing it down, and appointing a liquidator to wind up the company.