How do I know if my company is solvent or insolvent?
Whether your company is solvent or insolvent is one of the most important things a director needs to get right. It determines your legal obligations and whether you need to consider restructuring, administration or liquidation.
What it means for a company to be solvent
Under Australian law, a company is solvent if it can pay all its debts as and when they fall due. In simple terms:
- The business has enough available cash or resources that can be turned into cash quickly
- The company can make payments to suppliers, employees, the ATO and lenders when required
Having profit does not automatically mean a company is solvent. What matters the most is cash flow and the ability to meet payments when they fall due. A company can show profits on paper but still lack the cash flow to pay its debts.
What it means for a company to be insolvent
A company is insolvent when it cannot pay its debts as they fall due. Insolvency is about a company’s current and immediate ability to pay debt, not whether the company might be valuable on paper. Even if the company owns valuable assets, it could still be insolvent if those assets cannot be turned into cash quickly enough to meet the immediate liabilities.
Warning signs of insolvency
Directors should watch for these red flags. If several of these appear together, it may mean the company is in serious financial distress:
- Repeated late payments to suppliers
- Overdue tax debts (including ATO arrears)
- Bounced cheques or cancelled payment orders
- Payroll not being met on time
- Reliance on new loans to pay old debts
- Formal demands or legal threats from creditors
The Cash Flow Test
The primary legal test for solvency in Australia is the cash flow test: Can the company pay its debts when they are due and payable?
If the answer is “no” or is likely to become “no” in the near future, then it may be considered insolvent.
The Balance Sheet Test
In practice, courts and insolvency professionals sometimes also look at the balance sheet:
- Whether total assets exceed total liabilities
- Whether assets are realistically valued and liquid
- Whether there are any contingent liabilities
If liabilities significantly outweigh assets and no realistic path exists, this can support a finding of insolvency. However, the balance sheet alone is not conclusive; being unable to pay debts on time is the real measure.
What if I’m Unsure?
If you suspect your company’s financial position is precarious:
- Review cash flow carefully (look at current funds and upcoming obligations)
- Prepare an updated list of debts and due dates
- Talk to an accountant or an insolvency practitioner
Directors have a legal duty to prevent insolvent trading. They should not let debts accumulate when there is no reasonable prospect of recovery as Australian law prohibits this. Directors can face serious consequences, including civil penalties and personal liability.
Do you have more questions about our Company Liquidation? Read our full guide here
The Importance of Seeking Professional Advice
This article has aimed to provide general information about identifying if a company is solvent or insolvent, however, every company’s exact circumstances are different. We strongly encourage directors unsure whether their company is solvent or insolvent and seeking to assess its financial position to give an insolvency professional like Dissolve to discuss your specific circumstances. Dissolve may even recommend cheaper (or free!) solutions than other insolvency firms.
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