Are You Concerned About a Company’s Solvency?
It is a company’s ability, utilising cash resources they have or can obtain to meet debts as and when they fall due, that indicates a company’s solvency. Solvency is not to be determined by the application of a rigid rule, but rather is a factual question to be determined in the light of all the circumstances.
Definition of Solvency
The Corporations Act 2001 provides that a company is insolvent if it cannot pay its debts as and when they become due and payable.
When is Solvency Assessed
Solvency must be considered at the time the relevant debt is incurred rather than when the debt becomes due for payment.
The immediate future must be considered when examining the company’s ability to pay its debts. Exactly how far into the future this assessment extends is reliant on individual circumstances and to the extent future liabilities are known. Therefore, reliable and well considered cash flow forecasts are critical to this assessment.