What to do if you suspect your client may be slipping into insolvency?

As bookkeepers, we are most likely to be aware of a client’s circumstances ahead of the other professionals working with them (and even before the client!).  Insolvency is certainly one such circumstance and this needs to be carefully navigated.

So what should a bookkeeper do when these concerns arise?

A bookkeeper should discuss concerns related to potential insolvency with the client(s) directly, making a strong recommendation that the client connect with their accountant or legal adviser to explain possible steps to trade out of the situation; and, the potential consequences of trading insolvent as a director or business owner.  Ensure that this advice is explained in writing for your records, including the fact that you are not an insolvency expert and advice from these professionals should be sought as early as possible.  Even if the initial conversation takes place verbally, it is a good idea to follow this up with an email covering the topics you have discussed and the information you have imparted.

Certainly advise your client to continue to meet their compliance obligations around BAS, Superannuation, PAYG etc as the ATO will work more favourably with those businesses who are being pro-active in managing their affairs.

This can be a very stressful time for clients to navigate and the potential of qualified professionals assisting to design a course of action can actually be a very welcome relief.   Advising clients that in some cases where early action has been taken businesses have been capable of trading out of insolvency with the appropriate professional advice and support.

What a bookkeeper must not do

  • You cannot disclose information about your client’s affairs (including their capacity to pay bills) to any third party without the client’s consent.  Therefore, if a creditor or employee questions your client’s capacity to pay their obligations and commitments, you must refer them to your client
  • You cannot knowingly assist your client in breaking any law, so don't make any arrangements with creditors on their behalf

I would suggest emailing your client with a helpful and friendly tone emphasising that you are not an insolvency expert and you believe that it would be in their best interest  and those associated with the business, to seek qualified accounting and legal advice as soon as possible to understand their obligations.  Also pointiout that these qualified professionals may be able to assist the business in trading out of this difficult situation. 

If you give the client these suggestions and he or she continues to ignore the situation and fail to take action, then ideally, I think you should consider not acting in any capacity for this client. 

Further reading for Company Directors: ASIC on
Directors – what to do if a company is in financial difficulty