Discussing insolvency with a client is never easy. It’s an uncomfortable topic, often met with stress, denial, or frustration. Yet, avoiding insolvency conversations only increases the risk of financial collapse, leaving fewer options available for recovery.
As a trusted adviser, your clients rely on your expertise to guide them through financial uncertainty — and knowing their options will help you provide the best possible support.
This article will equip you with the knowledge to confidently approach insolvency conversations, ensuring your clients take proactive steps rather than waiting until it’s too late.
Why Conversations About Insolvency Matter
When businesses face financial distress, time is of the essence. The earlier insolvency risks are identified, the more recovery options remain available. Unfortunately, many business owners delay seeking help due to fear, stigma, or misconceptions about insolvency.
According to the Australian Securities and Investments Commission (ASIC), over 11,000 Australian businesses entered external administration in the 2023–24 financial year — a 39% increase from the previous year. This surge highlights the growing insolvency risk your clients face today.
These businesses may have had more favourable outcomes if they had taken action sooner. Delayed intervention can result in mounting debt, deteriorating creditor relationships, and missed restructuring opportunities.
As an adviser, you can guide your clients toward timely, strategic decisions and safeguard their business.
How to Initiate Conversations Around Insolvency With Clients
Starting the conversation is often the most challenging part. Here are key strategies to make discussions productive and solutions-focused.
1. Frame the Conversation Around Business Viability
Instead of using the word “insolvency” upfront, begin by discussing business sustainability.
Ask questions such as:
- How is your cash flow trending?
- Have you had any difficulty meeting tax or supplier payments?
- Are you concerned about your debt levels?
By focusing on financial health rather than failure, you encourage constructive dialogue rather than defensiveness.
Accountants, in particular, have valuable insights into the numbers and can shift their attention to addressing the emotional effects of tight cash flow.
2. Position Yourself as a Strategic Partner
Your role extends beyond compliance or legal matters — you are a partner in their business journey.
Let your client know:
- They are not alone — many businesses experience financial distress, and solutions exist.
- Your goal is to help them make informed decisions, whether that’s restructuring, refinancing, or exiting strategically.
- The earlier they act, the more control they retain over the outcome.
3. Explain the Consequences of Inaction
Many business owners underestimate the consequences of ignoring insolvency risks. Explaining the potential repercussions can encourage a more proactive attitude.
Director Penalty Notices (DPNs)
The ATO has ramped up debt recovery, issuing 26,702 DPNs worth $4.4 billion in 2023–24. Directors can become personally liable for unpaid PAYG and superannuation and should understand what that means for them and their family.
Trading while insolvent
Continuing to operate while unable to meet obligations can expose directors to legal consequences, ranging from disqualification from managing a company up to five years imprisonment.
Limited restructuring options
Delaying action can eliminate the possibility of Small Business Restructuring (SBR), which allows eligible businesses to restructure debts while continuing to trade.
4. Present Insolvency as a Strategic Decision, Not a Failure
The word “insolvency” often carries a negative stigma, but in reality, it serves as a financial and legal mechanism designed to protect businesses and their creditors.
Rather than viewing it as a failure, it should be viewed as an opportunity to restructure and regain control, a means to mitigate legal and financial risks, and a strategic approach to preserving business value.
When positioned correctly, insolvency procedures become proactive solutions that allow businesses to recover.
5. Offer a Pathway Forward
Once a client understands the risks, outline their options. Some key processes to consider include the following:
Small Business Restructuring
Small Business Restructuring (SBR) allows eligible businesses to restructure their debts while maintaining operational control. This process provides a formal pathway for businesses to negotiate with creditors, establish a repayment plan, and avoid liquidation.
Businesses must meet specific criteria to qualify, including having liabilities under $1 million. SBR offers a structured solution that enables directors to remain in charge while working towards financial recovery.
Voluntary Administration
Voluntary Administration (VA) allows financially distressed businesses to negotiate with creditors under the supervision of an independent administrator.
The process aims to assess whether a company can be restructured or if an alternative course of action, such as a Deed of Company Arrangement (DOCA), can be pursued to avoid liquidation. VA allows businesses to pause creditor actions and explore all viable options before deciding on their future.
Formal Liquidation
Voluntary liquidation offers a structured and legally compliant exit strategy when restructuring is not feasible. The process involves appointing a liquidator to wind up the company’s affairs, sell assets, and distribute proceeds to creditors in an orderly manner.
It’s important to note that if SBR has been attempted (and failed), the Small Business Restructuring Practitioner cannot be appointed for the liquidation process.
While liquidation signifies the end of a business, it helps directors meet their legal obligations and prevents the risk of trading while insolvent, which could lead to personal liability. Seeking expert guidance ensures the process is handled efficiently and with minimal complications.
Encourage your client to speak with an insolvency professional early in the process to assess the best course of action.
Why Timely Conversations Lead to Better Outcomes
Starting insolvency conversations at the first signs of financial difficulty ensures your clients have the best chance to restructure or exit their business in a controlled manner. As a lawyer, accountant, or other adviser, being well-informed on insolvency options will enable you to provide advice that protects your clients and strengthens your professional reputation.
If your clients show signs of financial distress, don’t wait for the situation to deteriorate. SALEA Advisory offers expert guidance in restructuring and insolvency solutions, ensuring that businesses can navigate financial uncertainty with confidence.
Contact us today to discuss how we can support your clients through challenging times.
