WHY EARLY INSOLVENCY ADVICE REFERRALS EQUAL BETTER OUTCOMES
Admitting financial distress in business isn’t something you roll over for. Bringing in an insolvency specialist? Not a chance. That’s admitting defeat. Or so the thinking often goes for many business owners and accountants. But recognising “Okay, there are some warning signs of financial hardship here” early and referring a client for specialist help is actually the smartest move you can make. Early referral for business insolvency advice opens more options, reduces financial strain, and increases the chance of turning the situation around – giving your client the best possible outcome.
Financial challenges: sliding doors
Place yourself in this situation. A client’s finances have been looking shaky for a while. They have ongoing ATO arrears, repeatedly use payment plans and loans, and are struggling to meet their super obligations.
Scenario 1 – without early insolvency advice
In one scenario, you work with the client to manage the issues as best you can. You suggest payment plans, advise on cash flow and closely monitor their finances.
But over a few months, the situation gets worse: debts mount, creditor pressure increases, cash flow tightens, and the client is forced into a rushed, stressful position. Valuable options for restructuring are lost, and both you and your client feel the professional and personal strain.
Scenario 2 – with early insolvency advice
In a second scenario, you spot the early signs of financial distress and refer your client to an insolvency practitioner straight away.
Together, you explore options while the business is still in a manageable state. Your client and other directors are helped to understand their duties, risks are minimised, and their business has a chance to restructure or stabilise. The process is calmer, more controlled and a lot more positive for everyone involved.
An accountant’s duty of care
This example is a sliding doors moment. And as the accountant, you can be the one to choose the best path.
In fact, as part of your duty of care, you’re expected to help clients to the best of your ability. This includes:
- Exercising skill, care and diligence in your professional work
- Giving advice that’s competent, timely and based on accurate information
- Considering the legal and financial consequences of your actions
So, if you spot early warning signs of financial distress or company insolvency, you should be informing your client and advising on next steps.
Referring a client to an insolvency specialist when the situation calls for it isn't a gap in your service. It's exactly what good professional judgement looks like.
Early versus late insolvency advice referral
We’ve laid out the different scenarios, now let’s look at the specifics. What are the options available to business owners for early versus late referral?
Options for early insolvency advice referral
When a client’s business is experiencing financial challenges but still solvent or only just approaching insolvency, the following options may be open to them:
- Informal restructuring – This involves your client working with creditors to renegotiate debts, adjust payment schedules or cut non-essential costs without entering formal insolvency procedures. It’s usually faster, cheaper and can keep business relationships intact.
- Safe harbour protection – Under the Corporations Act 2001, directors can enter safe harbour if they follow a plan likely to improve their company’s position. It temporarily protects them from personal liability for insolvent trading, so they have time to restructure or turn things around.
- Small business restructuring (SBR) – This formal process is available to eligible small businesses with debts under $1 million. It lets directors propose a plan to creditors to keep the business running while repaying debts. This offers a flexible, creditor-driven alternative to liquidation.
- Negotiated payment arrangements with creditors – Your client, as a director, can ask creditors for temporary relief, to defer payments or agree on longer schedules. This eases cash flow pressures and cuts the risk of enforcement, but they need to be willing, and any arrangement must be realistic.
- Voluntary administration (VA) – This formal insolvency process involves an external administrator taking control of your client’s company to assess the best way forward. It protects the business from creditor demands while exploring options like restructuring, sale or liquidation, giving much-needed breathing room to plan in a controlled way and often boosts creditor returns.
See also: SBR surge helps keep struggling companies afloat | Small business restructuring factsheet
Options for late insolvency advice referral
If you refer a client after corporate insolvency is clear or creditor pressure has ramped up, the options, unfortunately, become much narrower:
Company liquidation – During this formal insolvency process, a liquidator takes control of your client’s company, sells its assets and distributes proceeds to creditors. It’s typically the last resort, leaving little value for owners. Plus, the business usually stops trading. Liquidation is legally binding and highly structured, with strict compliance rules.
Court-ordered restructuring or administration – When voluntary options aren’t possible, the court can order formal restructuring or administration. This process is rigid, expensive and controlled by the court or an appointed administrator rather than the directors. This means your client will have little control over what happens, and decisions are binding.
Limited negotiation leverage with creditors – If insolvency is clear, creditors have greater legal rights and less incentive to compromise. In this situation, your client has fewer opportunities to renegotiate repayment terms, delay enforcement or continue operating. Negotiations are usually handled through formal legal or administrative processes.
See also: Liquidation or administration
Better outcomes of early referral
The advantages of early versus late referral are clear. Early referral:
Maintains business value – Your client has more options to restructure or stabilise their business.
Reduces financial and personal risk – Your client, as director, and you, their accountant, are better protected from legal or professional exposure, including personal liability under the Corporations Act.
Maintains flexibility and control – The business and your client and their leadership team can make decisions rather than being forced into formal processes, like liquidation or court-ordered administration,
Protects relationships with creditors and stakeholders – Early engagement shows professionalism and can make negotiations smoother, maintaining trust and goodwill.
Allows for calmer, more strategic planning – There’s less pressure and stress and more time to explore viable solutions.
Increases the likelihood of a positive outcome – Your client has a good chance of turning things around successfully.
Practical advice for accountants
To ensure your client can benefit from the advantages of early referral, here’s what you need to be doing as their accountant:
Monitor your clients for early warning signs of financial distress – This includes:
- Constant cash flow problems
- Ongoing ATO or creditor arrears
- Reliance on loans or payment plans
- Shrinking profitability or margins
- Unusual or increasing debt
- Delayed or incomplete financial reporting
- Customer or supplier complaints
- Employee concerns or high turnover
- Overdrawn personal guarantees
- Stress on director or management decision-making
Have an early referral process in place – Know your trigger points and who to call when insolvency advice is needed.
Document your advice and actions carefully – If questions are ever raised later, a clear paper trail protects both you and your client.
Communicate the benefits of early referral to your clients – Frame it as a proactive step rather than a last resort. This makes conversations much easier.
See also: 10 warning signs of business failure
Early insolvency specialist referral is a win, not a defeat
Early referral isn’t you or your client admitting defeat. It’s giving them the best chance to navigate their financial situation and turn things around. Plus, it ensures you meet your duty of care.
If you’re noticing financial challenges and early signs of insolvency in a client’s business, refer them to our insolvency and restructuring experts now on (02) 4908 4444 or (02) 6580 0400 for free initial advice. We’ll help them understand their position and options, keeping discussions strictly confidential.
