The 14 Indicia of Insolvency: Why Every Business Owner Should Know the Warning Signs
Insolvency doesn’t usually arrive with a grand announcement. Instead, it often creeps in quietly, with small signs that are easy to ignore - until they aren’t. For Australian business owners, understanding the 14 indicia of insolvency is critical not just for legal and compliance reasons, but for safeguarding the future of your business.
What is Insolvency?
In Australia, a company is considered insolvent when it cannot pay its debts as and when they fall due.
When assessing insolvency, the courts commonly refer to a set of practical indicators-known as the 14 indicia of insolvency, as discussed in ASIC v Plymin, Elliott & Harrison [2003] VSC 123 (5 May 2003) more fondly referred to by insolvency practitioners at “The Water Wheel Case” to determine whether a company is in financial distress.
The 14 Indicia of Insolvency
The 14 indicia serve as warning signs that a company may not be solvent. They are:
1. Continuing losses
Ongoing trading losses suggest the company is not operating profitably and may not be able to recover financially.
2. Overdue Commonwealth and State taxes
Failure to pay tax obligations such as PAYG, GST, and payroll taxes may indicate cash flow issues or financial mismanagement.
3. Liquidity ratios below 1
When current liabilities exceed current assets, the company lacks sufficient working capital to pay debts as they fall due.
4. Poor relationship with present bank, including inability to borrow further funds
Banks withdrawing support, cancelling facilities, or refusing additional credit are significant red flags.
5. No access to alternative finance
Inability to secure funding from other lenders or financiers can indicate the company is considered high-risk.
6. Inability to raise further equity capital
When directors or shareholders are unwilling or unable to inject additional capital, it may reflect broader concerns about viability.
7. Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply
If trade suppliers no longer trust the business to pay on time, it indicates significant reputational and financial stress.
8. Creditors unpaid outside trading terms
Consistently late payments to creditors often point to systemic cash shortages.
9. Issuing of post-dated cheques
This is often used as a short-term fix for a cash crisis, suggesting the company doesn’t have funds available now.
10. Dishonoured cheques
Cheques returned due to insufficient funds reflect immediate liquidity problems.
11. Special arrangements with selected creditors
Negotiating extended payment terms or informal deals with some creditors—especially outside formal arrangements—may indicate broader financial distress.
12. Solicitors’ letters, summonses, judgments or warrants issued against the company
Legal demands, creditor enforcement actions, or court orders show that the company is unable (or unwilling) to pay its debts.
13. Payments to creditors of rounded sums not reconcilable to specific invoices
This can signal a lack of proper accounting controls, or an attempt to delay or obscure payment obligations.
14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts
Failure to maintain up-to-date records hinders management’s ability to understand or respond to the company’s financial position—potentially leading to insolvent trading.
A Note on the Indicia: It Doesn’t Take All Fourteen
It’s important to understand that not all 14 indicators need to be present for a company to be considered insolvent. In fact, insolvency can be established even if only a few signs are evident, depending on their severity and context.
It is important to take a holistic view, assessing the commercial reality of a company's financial position. Insolvency is fundamentally about inability to pay debts as and when they fall due. Therefore, if a company shows even a handful of serious indicators—such as ongoing trading losses, overdue tax obligations, dishonoured payments, or creditor legal action—it may be found to be insolvent.
These indicators are not a checklist, but rather warning signals that, in combination, help paint a picture of a company’s financial health.
Directors should not wait for all the signs to appear. One or two may be enough to warrant action.
If in doubt, seek advice early. Timely intervention is not just about compliance -it’s about protecting the business, its stakeholders, and the directors themselves.
Why Business Owners Should Care
Early Detection Saves Businesses
Recognising these signs early can give business owners the chance to take proactive steps - whether that’s renegotiating with creditors, restructuring, seeking professional advice, or considering voluntary administration.
Avoid Personal Liability
If directors allow a company to trade while insolvent, they can be held personally liable for the debts incurred during that time. Understanding the indicia of insolvency helps directors fulfil their duties and mitigate this risk.
Protect Employees, Customers, and Creditors
Early action can result in a more orderly outcome, protecting the interests of employees, customers, suppliers, and other stakeholders.
Preserve Value
Financial distress doesn’t automatically mean the end. Timely intervention can preserve the value of the business, increase the chances of turnaround, or lead to a more favourable exit.
Final Thoughts
Insolvency is not always obvious, and it rarely happens overnight. Business owners should remain vigilant, regularly monitor financial performance, and seek advice at the first signs of trouble.
Understanding the 14 indicia of insolvency isn’t just a technical exercise—it’s a practical tool to protect your business, your people, and your peace of mind.
If you’re concerned about your company’s financial position or would like a solvency review, reach out for a confidential discussion.
