Is my company insolvent? How the cash-flow test actually works

“Are we insolvent?” is a question many directors ask quietly, late at night, after a run of tight months. It deserves a proper answer rather than a gut feeling. The good news is that the legal test is clearer than most people expect, and working through it honestly often shows more room to move than the fear suggests.

What does “insolvent” actually mean?

Section 95A of the Corporations Act sets out a single test. A company is solvent only if it can pay all its debts “as and when they become due and payable”. If it can’t, it’s insolvent. ASIC’s guide for directors puts it in one line: a company is insolvent “when it cannot pay its debts when they are due.”

Three things follow from that wording:

• It’s about timing. The question isn’t whether you could pay everything eventually. It’s whether you can pay each debt when it falls due.
• It’s about all debts. The ATO, super, suppliers, the landlord, the bank, wages.
• It’s a moment-in-time question, asked repeatedly. A company can move in and out of trouble. The answer in March may differ from the answer in October.

Why isn’t the balance sheet the answer?

Plenty of directors reassure themselves by looking at net assets: “We own the factory, so we can’t be insolvent.” Unfortunately, that’s not the test. A company can show a healthy balance sheet and still be insolvent if its value is locked up in property, equipment or slow debtors that can’t be turned into cash before the bills arrive.

The reverse also catches people. A company with negative net assets on paper (perhaps after a big write-down or a loss year) may still be solvent if it’s paying every bill on time and has funding available.

The balance sheet is evidence, not the verdict. What decides it is cash, and cash you can realistically get.

Is a bad month the same as being insolvent?

No. Courts have long separated a temporary lack of liquidity from an ongoing, built-in shortage of working capital. A seasonal dip, a late-paying major customer or one unusually large bill doesn’t, by itself, make a company insolvent, as long as there’s a realistic path to paying on time or close to it.

What tips the balance is the pattern. ASIC lists warning signs that point to a deeper problem, including:

• ongoing losses and poor cash flow;
• increasing debt;
• overdue tax and super;
• creditors paid outside their usual terms;
• suppliers moving you to cash on delivery;
• directors resigning or disagreeing about the company’s position.

One of these on its own is a reason to look harder. Several together, lasting more than a month or two, is a reason to act. Our monthly cash check covers the early, softer signs. This guide is about what to do when those signs have hardened.

What counts as “able to pay”?

This is the part most directors don’t know, and it matters. When solvency is assessed, you don’t just count the cash in the account today. You also count money the company can realistically raise within a short time. That includes:

• Borrowing that’s genuinely available, such as an undrawn overdraft or line of credit, or a loan secured on property owned by the company or a director.
• Assets that can be sold quickly at a sensible price, such as surplus equipment or stock.
• Debtors who will genuinely pay soon, not invoices that are 120 days old and disputed.
• Support from directors or shareholders that’s committed, not just talked about.

The key word is realistic. A vague plan to “get a loan at some point” doesn’t count. A refinance that a funder has assessed, with security, documents and a settlement path in place, is a very different thing.

This is why the funded way out sits so close to the solvency question. Property equity, a refinance or an unsecured cash-flow facility can be the difference between “can’t pay as debts fall due” and “can”. If that’s your situation, tell us about the debts and the security and we’ll look at whether a facility is realistic. There’s no credit check involved in a first enquiry.

A 30-minute solvency check you can run today

Grab your accounting file, bank statements and ATO account balances. Then work through this table, ideally with your accountant.

Step	What to do	What it tells you
1. List what’s due	Every debt due in the next 30, 60 and 90 days: ATO, super, wages, rent, suppliers, loan repayments	Your real short-term obligations
2. List what’s coming in	Cash at bank, plus debtors realistically expected in each period	Your near-term cash
3. Find what’s overdue	Anything already past its due date, and by how long	Whether you’re already behind
4. Add realistic funding	Undrawn facilities, equity in property, saleable surplus assets	Your genuine ability to pay
5. Look for a letter	DPNs, statutory demands, default notices, garnishees	Whether a hard deadline is already running
6. Compare	Can each period’s debts be paid on time with steps 2 and 4?	Your honest answer

If step 6 is “yes, with the funding in step 4”, the next move is to make that funding real, quickly. If it’s “no, even with everything”, you need advice about formal options. Our which debt first tool helps you order the list in step 1.

Which letters change the picture?

Some letters don’t just add pressure. They change the legal position.

• A statutory demand. If a company doesn’t pay, settle or apply to set aside a statutory demand within 21 days of service, the court can presume the company is insolvent in a later winding-up application. Read our page on statutory demands if one has arrived.
• A director penalty notice. A DPN makes certain company tax debts the director’s personal problem. It gives 21 days from the day the ATO posts it, and lockdown DPNs can only be cleared by payment. See our director penalty notice page.
• A default notice from a lender. It may set a remedy date, after which the lender can call in the whole facility, which can turn a manageable position into an impossible one overnight.

If any of these is on your desk, the solvency question has a deadline attached.

What’s at stake for directors?

ASIC is direct about this. If a director lets an insolvent company keep incurring debts, the consequences can include:

• civil penalties for the individual director;
• personal compensation claims brought by ASIC, a liquidator or a creditor, which ASIC describes as potentially unlimited and which can lead to personal bankruptcy;
• criminal charges where dishonesty is involved.

ASIC also warns against a “head in the sand” approach of hoping things improve. Its guidance for directors centres on four habits: stay informed about the company’s finances, assess solvency regularly, get appropriate advice, and act on it in good time.

None of this means panic. It means do the test, write down what you found, and act on it.

Where does safe harbour fit?

Safe harbour, in section 588GA of the Corporations Act, can protect directors from personal liability for insolvent trading while they develop and pursue a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation. A properly assessed refinance can be part of that plan.

Two conditions are easy to lose sight of under pressure: employee entitlements, including super, must be paid when due, and tax lodgements must be kept up to date. Our page on safe harbour and refinancing explains how the pieces fit.

An illustrative scenario

Illustrative only. Two directors run a joinery business in Adelaide. A major builder client has slowed its payments, two quarters of GST and PAYG withholding are unpaid, and their timber supplier has just moved them to cash on delivery. Super and BAS lodgements are current. The company’s balance sheet looks fine because it owns its workshop.

They sit down with their accountant and run the check. Over the next 60 days, the debts due clearly exceed cash and expected receipts. On those numbers alone, they can’t pay as debts fall due. But the workshop carries significant equity.

They approach a funder, who assesses a second mortgage over the workshop to clear the ATO arrears and the overdue supplier account. With the facility approved and a settlement date set, their accountant reworks the forecast: with the loan funds, every debt in the next 90 days can be paid on time and the new repayments fit the trading figures. They keep wages, super and lodgements current throughout, document the plan, and agree tighter payment terms with the builder.

The point isn’t that funding always works. It’s that the solvency answer depended on whether funding was realistic, and they found out early enough for it to matter.

When won’t funding help?

Honesty matters here. Borrowing doesn’t fix a business that loses money every month. If the forecast shows the company can’t service new repayments, or there’s no security and the bank statements don’t support unsecured funding, a loan would only move the problem and add cost. In that case, an early conversation with a registered liquidator or small business restructuring practitioner may protect you and your creditors far better. Our guide on how to avoid liquidation walks through the options to check first.

Not sure which side of the line you’re on? Let’s look at the numbers together

Asking “are we insolvent?” usually means the company needs breathing room, and soon. If there’s property equity or steady turnover behind the business, a refinance or consolidation may turn “can’t pay as debts fall due” into “can”, which is exactly the shift the cash-flow test looks for.

Enquiring takes about 60 seconds, and there’s no credit check when you first enquire. We won’t spray your details across a pile of lenders, so your phone won’t start ringing off the hook. A real person reads your enquiry, looks at your company’s position, the debts and any deadlines, and calls you. Please fill the form in accurately, including what’s overdue and any letters you’ve received, so we can match the right option first time. Whether funding is realistic depends on the security, the documents and the days left, so the earlier you start, the more doors stay open.

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