For many small and medium business owners, the word insolvency carries an undesirable stigma.
It is often associated with business failure, liquidation, or “the end of the road”. It comes with a fear of what may lie ahead: the potential loss of a business built over many years, concern about personal assets, anxiety about reputation, and a sense that calling for help somehow reflects failure.
There can be a loss of dignity involved in admitting that something is no longer working – particularly for business owners who are used to solving problems themselves and carrying responsibility for employees, customers, suppliers and family members.
As a result, directors frequently delay seeking advice – very often until options have narrowed and significant value has been destroyed. Avoiding the conversation does not remove those risks; it usually increases them.
But for directors who proactively seek advice, the reality can be very different. Consulting an insolvency expert need not be a last resort. In many cases, it is a proactive step that can preserve value, protect directors and significantly improve the prospects of corporate recovery.
Why Early Insolvency Advice Changes Outcomes
The initial discussion with an insolvency expert is about understanding the present position, the factors that have led to it, and the best options to move forward.
At the advisory stage, the focus is on clarity, risk management and preserving choices while they still exist. In practice, early advice gives directors the opportunity to address problems in an orderly way – before events are dictated by creditors, regulators or the courts, and before options narrow to outcomes that are far more confronting.
Breaking the Stigma: Insolvency Advice Is About Options, Not Closure
A common misconception is that speaking to an insolvency practitioner inevitably leads to liquidation.
In practice, an insolvency expert provides independent, professional guidance on the company’s financial position and the options available, helping directors understand how those options may affect them, the company’s creditors and other stakeholders.
The real issue is timing – and this is where things often go wrong.
When advice is sought early, the range of available options may be broad. Delay, by contrast, usually limits choices, increases personal risk for directors, and erodes business value.
By the time many directors seek advice, they are no longer looking for options – they are looking for damage control. The options that were once available have closed off. Early consultation is often the difference between an orderly restructuring and a forced outcome driven by creditor action.
As a 30-year veteran in the insolvency and reconstruction space, I have seen many cases where directors have delayed seeking advice until a triggering event occurs – such as a winding-up application or a Director Penalty Notice issued by the ATO. Advice sought earlier may have enabled a far less damaging outcome than the one directors are ultimately forced to confront.
What Is an Insolvency Expert?
An insolvency expert is a licensed professional, registered with the Australian Securities & Investments Commission (ASIC) as a liquidator, who carries professional indemnity insurance and is qualified to advise companies in financial difficulty and, where necessary, accept formal appointments.
In Australia, insolvency practitioners are regulated by ASIC and must also be members of a recognised professional accounting body.
Core Functions of an Insolvency Expert
An insolvency expert will typically:
- Conduct an independent review of the company’s financial position
- Assess solvency and cash flow viability
- Explain the full range of formal and informal debt solutions
- Advise directors on their legal duties during financial distress
- Engage with secured creditors where appropriate
- Implement restructuring or insolvency processes where necessary
Ethical Standards
Insolvency practitioners are bound by strict ethical obligations, including:
- Integrity
- Objectivity
- Professional independence, competence and due care
- Confidentiality
- Professional behaviour
These principles exist to ensure directors receive clear, independent advice – not predetermined outcomes.
When Should You Seek Business Insolvency Help?
Directors are legally required to monitor solvency on an ongoing basis.
While there is no law requiring a business to trade at a profit, there is an obligation to ensure that the company pays its debts as and when they fall due. An unprofitable business will, at some point, typically run out of cash and default on creditor payments.
Incurring new debt when there are no reasonable grounds to believe that the company can pay that debt (and all other debts) on time may amount to insolvent trading – a breach of the law. Adherence to directors’ duties generally requires consideration of two primary financial tests.
- The Cash Flow Test (Legal Test)
- Can the company pay its debts as and when they fall due?
- The Balance Sheet Test (Indicative Test)
- Do total liabilities exceed the realisable value of total assets?
While a balance sheet deficiency is not itself determinative, it is often a strong indicator of looming or actual insolvency.
Failing the cash flow test may indicate insolvency. In practice, however, directors usually encounter warning signs well before these thresholds are formally crossed.
Warning Signs: A Practical Guide for Directors
🔴 Immediate Advice Recommended (Red)
- Inability to pay employees, suppliers, or tax obligations on time
- Statutory demands or legal proceedings from creditors
- Bailiff or sheriff action
- Failed ATO payment arrangements
- Reliance on short-term funding to meet basic obligations
🟠 Seek Advice Promptly (Amber)
- Persistent cash flow shortfalls
- Multiple loss-making quarters
- Growing tax arrears
- Directors injecting personal funds to sustain trading
- Discounting prices to win work without restoring profitability
🟢 Monitor Closely (Green)
- Temporary cash flow issues with a clear recovery pathway
- Seasonal volatility supported by adequate reserves
If your business is consistently operating in the red or amber zones, consulting an insolvency expert should not be delayed.
The Benefits of Consulting an Insolvency Expert Early
Understanding the Full Range of Options
In my experience, directors who seek advice early usually have a far wider range of restructuring options than those who wait until creditor pressure forces the issue.
Early advice allows directors to properly evaluate recovery strategies, which may include:
- Small Business Restructuring (eligibility criteria apply)
- Voluntary Administration – providing a moratorium on creditor action
- Deed of Company Arrangement (DOCA) – a formal compromise or restructuring of debts
- Asset or business restructuring before insolvency emerges
- Controlled wind-down strategies
Each option carries different consequences for control, reputation and creditor outcomes.
Taking Back Control
Financial distress often leaves directors feeling powerless. Professional advice restores agency by replacing uncertainty with a clear roadmap – even where difficult decisions must be made.
Independent Perspective
Business owners are understandably emotionally invested. An insolvency expert provides a detached, evidence-based assessment of what is viable and what is not.
Protecting Directors: Legal Risks and Responsibilities
As insolvency approaches, a director’s focus must shift from shareholder interests to protecting creditors.
Key Risks Directors Must Avoid
- Insolvent trading – continuing to incur debts with no reasonable prospect of repayment
- Criminal insolvent trading – deliberately or fraudulently defeating creditors
- Unfair preferences – paying favoured creditors while others go unpaid
- Breach of duty, including:
- Selling assets for less than market value
- Applying company property for personal benefit
- Stripping assets during financial collapse
The Importance of Early Advice
Seeking professional insolvency advice is a critical protective step. It demonstrates that a director has taken reasonable steps to minimise creditor losses – an important consideration if conduct is later reviewed.
Q&A: Common Questions from Directors in Financial Distress
- Does consulting an insolvency expert mean I will lose my business?
- No. In many cases, the goal is to stabilise the business, restructure debts, and keep trading where viable.
- What is the difference between bankruptcy and insolvency?
- Bankruptcy applies to individuals. Insolvency is the inability to pay debts as and when they fall due and applies to companies, partnerships and individuals.
- What should I bring to the first meeting?
- Useful information includes:
- A list of assets (including receivables, stock and fixed assets)
- A list of creditors with amounts owed
- Recent financial statements and BAS records, including the ATO running balance
- Useful information includes:
Perfect records are rarely available at this stage. What matters is having enough information to understand where things really stand.
Final Thoughts
Ignoring the problem and hoping it resolves on its own will rarely fix structural cash flow issues. In fact, delay often allows damage to accumulate.
Financial distress is confronting, but silence and inaction are usually the most damaging responses.
Consulting an insolvency expert early expands your options, protects you as a director, and can significantly improve outcomes for all stakeholders.
Insolvency advice is not about surrender – it is about informed decision-making, lawful debt solutions, and giving corporate recovery the best possible chance.
