What is Pre-Insolvency?

Understanding the Critical Window for Business Recovery

When a business starts experiencing financial distress, directors often find themselves in uncharted waters — unsure of the best course of action and concerned about what the future holds. Pre-insolvency is the crucial period before a company is formally insolvent. It offers directors an opportunity to take proactive steps to protect the business, its assets, and its legal standing.

At de Jonge Read, we specialise in helping business owners navigate this critical phase, ensuring they understand their options and avoid actions that could worsen their financial position.

What Does Pre-Insolvency Mean?

A company is not immediately insolvent just because it is struggling financially. Pre-insolvency is the phase where a business:

• Is experiencing cash flow difficulties but can still operate.
• Has outstanding debts with the ATO, suppliers, or lenders but cannot meet all obligations.
• May have received warnings from creditors or experienced collection actions but has not yet defaulted entirely.

Directors in this situation often still have legal and strategic options—but waiting too long can close doors to better outcomes.

Why Early Action Matters

Delaying action can result in:

✅ Increased personal risk for directors – If a company becomes insolvent, directors may be held personally liable for debts under Director Penalty Notices (DPNs) or insolvent trading laws.

✅ Fewer restructuring options – Early intervention allows for solutions like Small Business Restructure (SBR), voluntary administration, or negotiated settlements rather than liquidation.

✅ Creditors taking control – If left unchecked, creditors may escalate their actions, such as issuing statutory demands, winding up applications, or enforcement proceedings.

At de Jonge Read, we work with directors before it reaches this stage — helping them assess their financial position and explore practical, legally compliant pathways to restructure or wind down with minimal damage.

Why Speak to a Pre-Insolvency Advisor Instead of an Insolvency Practitioner?

For directors facing financial distress, the people they seek advice from first can make all the difference. Insolvency practitioners (liquidators, administrators, or receivers) play an important role in winding up companies, but their duty is first and foremost to creditors — not to directors or business owners.

A pre-insolvency advisor, like de Jonge Read, works for the director — helping them understand their legal position and options before being forced into formal insolvency proceedings.

Key Advantages of Pre-Insolvency Advice:

🔹 Retaining Control Over the Outcome – Once a business enters liquidation or administration, directors lose control, and decisions are made based on creditors’ interests. Pre-insolvency advice ensures directors have explored all options before formal insolvency is considered.

🔹 Exploring Business Recovery – Many struggling businesses can be saved with restructuring, refinancing, or negotiation. Insolvency practitioners are not focused on business survival — pre-insolvency advisors help directors identify ways to recover and restructure.

🔹 Minimising Personal Liability – Directors can be held personally liable for unpaid ATO debt, superannuation, or trading while insolvent. A pre-insolvency specialist helps assess risks and implement strategies to protect personal assets.

🔹 Avoiding Unnecessary Liquidation – Some directors assume liquidation is their only option, when in reality, they may qualify for an SBR or other solutions that allow them to retain control and trade out of difficulty.

🔹 Negotiating With Creditors and the ATO – Engaging with creditors early can prevent formal recovery actions. Pre-insolvency advisors assist with negotiating payment arrangements, settling debts, and ensuring directors avoid costly mistakes that worsen their financial position.

🔹 Ensuring Compliance and Avoiding Illegal Phoenix Activity – Making the wrong move when closing or restructuring a business can result in severe legal consequences, including director bans and personal penalties. Pre-insolvency specialists provide legally compliant solutions to prevent directors from being accused of phoenix activity.

What Can Be Done in the Pre-Insolvency Phase?

✅ Reviewing the business structure – Determining whether restructuring, downsizing, or formal insolvency options are required.

✅ Assessing director liability – Understanding DPNs, ATO liabilities, and personal exposure to protect directors’ financial futures.

✅ Negotiating with creditors – Developing realistic payment arrangements or settlement agreements.

✅ Considering formal restructuring options – Evaluating SBR, Safe Harbour provisions, or voluntary administration.

✅ Avoiding illegal Phoenix activity – Ensuring any changes are compliant with corporate law to prevent personal or criminal liability.

How de Jonge Read Can Help

Our expertise lies in guiding directors through financial distress with a clear, structured approach that prioritises their best interests. Unlike liquidators or insolvency practitioners, who may focus on winding up the business, we provide directors with real options to move forward — whether that means restructuring, negotiating, or exiting in a controlled manner.

If you’re a director concerned about your company’s financial position, now is the time to act. Waiting until liquidation or bankruptcy is the only option is a mistake we see far too often.

Take action now. Contact the de Jonge Read team today to discuss the best course of action and protect your financial future.

For accountants, bookkeepers, and finance professionals working with SME clients, who you refer struggling business owners to is critical. Sending them straight to an insolvency practitioner may prematurely lock them into a liquidation or administration process that could have been avoided. By referring clients to a pre-insolvency specialist first, you ensure they have explored all their options before irreversible decisions are made.

Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Contact us now on p. 1300 765 080 | ua.mo1741263149c.arj1741263149d@ofn1741263149i1741263149

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