Insolvency Does Not Always Mean Liquidation

The terms insolvency and liquidation are often used interchangeably, but they mean different things.

Insolvency is a financial position. Liquidation is a formal process.

A company is insolvent when it cannot pay its debts as and when they become due and payable. This is primarily a cash-flow test. A company may have valuable assets but still be insolvent if those assets cannot be converted into cash in time to meet its debts.

Common warning signs include:

• ongoing cash-flow shortages;

• overdue ATO, superannuation or supplier debts;

• defaulted payment arrangements;

• suppliers withdrawing credit;

• increasing reliance on short-term funding; and

• statutory demands or other recovery action.