Insolvency Risk in 2025: Warning Signs for Business Owners
As we move through 2025, financial pressure on Australian businesses continues to rise.
Higher interest rates, tighter lending conditions, tax debt enforcement and supply chain
volatility are creating a sharp increase in insolvency appointments, creditor disputes
and restructuring activity.
For business owners, directors and SMEs, identifying the warning signs early can be the
difference between preserving value — or facing avoidable collapse, litigation or personal
exposure. At Boss Lawyers, we see the same patterns across many matters. Below are the
key red flags we advise clients to watch closely.
1. Increasing ATO Pressure and Tax Debt
The ATO has resumed aggressive recovery action. Warning signs include:
- Outstanding BAS, PAYG, GST or superannuation liabilities
- Payment plans repeatedly defaulting
- Director Penalty Notice (DPN) warnings or letters
- ATO garnishee notices on accounts or debtors
When tax debt grows unchecked, it is often the first external sign of a deeper cash-flow issue.
2. Cash Flow Crunch and Inability to Pay Debts on Time
The legal test for insolvency in Australia is simple: can the business pay its debts as
and when they fall due? Warning indicators include:
- Delays in paying suppliers or rent
- Relying on the next big invoice to meet payroll
- Continually extending or rolling over short-term loans
- Using ATO debt as cashflow
- Stretching payment terms beyond what was agreed
These are often early markers of liquidity stress.
3. Poor Financial Records or Missing Data
In many insolvency and litigation matters we act in, the business has:
- significant bookkeeping gaps
- unreconciled accounts
- out-of-date MYOB/Xero files
- incomplete debtor and creditor records
Poor records not only accelerate insolvency risk — they expose directors to
insolvent trading, breach of duty allegations and litigation risk.
4. Supplier Pressure and Demands for Prepayment
When suppliers begin tightening terms, ask for cash on delivery, or threaten to
suspend supply unless invoices are paid immediately, it is a major sign that the
business is perceived as financially risky.
These changes often trigger a downward spiral if not managed early.
5. Creditor Statutory Demands or Legal Letters
Formal pressure from creditors is one of the clearest indicators of insolvency trouble.
Typical steps include:
- Letters of demand
- Claims for unpaid invoices
- Statutory demands under s 459E
- Winding-up threats or applications
- Enforcement warrants or garnishees
