Is my company insolvent? The three tests

Test one: the cash flow test

Ask: over the next few months, can the company pay each debt on the day it is due, from money it actually has or can reliably get? Include the next BAS, super, wages, rent, loan repayments and supplier terms. A company that can only pay by selling its main assets, by borrowing from the director again, or by leaving the ATO unpaid is not paying its debts as they fall due.

Courts look at the commercial reality, not the bank balance on one day. A temporary shortfall with a firm source of funds coming is not insolvency. A pattern of paying whoever shouts loudest and rolling the rest forward is. The ATO debt is often the clearest signal: if the only way the company stays afloat is by using GST and PAYG withholding it has collected from others as working capital, the cash flow test is already failing.

Test two: the balance sheet test

Add up what the company owns at what it would actually fetch, and what it owes including the full ATO balance, GIC, employee entitlements, loans and lease commitments. If liabilities exceed assets, the company is balance sheet insolvent. This is not the legal test on its own, because a company with an overdraft it can service may be solvent despite negative net assets, and a company with valuable but unsellable assets may be insolvent despite positive ones.

It matters for two reasons. First, it is an indicator courts and liquidators use. Second, it fixes the number that decides your options: small business restructuring is only available if total liabilities are under $1 million, so you need the honest figure.

Test three: presumptions and warning signs

Some facts let a court presume insolvency without a cash flow analysis. The two that catch small companies are failing to comply with a statutory demand within 21 days, and failing to keep adequate financial records. ASIC's own list of indicators is the practical checklist:

• Ongoing losses and poor cash flow, with no budget or plan.
• Overdue taxes and superannuation.
• Creditors paid outside normal terms, or suppliers demanding cash on delivery.
• Overdraft at its limit, loan defaults, or an inability to borrow more.
• Letters of demand, summonses or judgments.
• Incomplete financial records, and difficulty producing accurate figures.
• Directors lending the company money to pay wages, or paying company debts personally.

Three or more of these usually mean the cash flow test would fail if applied honestly.

What to do next

1. Prepare a 13 week cash flow that lists every debt by due date, including the next BAS and super, and see whether it balances without new borrowing.
2. Total the company's liabilities at their full current amount, including the ATO balance with interest, to see whether restructuring is even available.
3. If the tests point to insolvency, get advice from a registered liquidator or restructuring practitioner within days, not months, and stop incurring new credit in the meantime.

More questions: 16 Bankruptcy, liquidation and SBR questions questions answered · Full guide: Liquidation & ATO debt