Spotting a Company in Difficulty: 8 Warning Signs Before Insolvency

Quick answer. Insolvency — the inability to meet due liabilities with available assets (article L631-1 of the Commercial Code) — must be declared to the court within 45 days (L631-4). But it announces itself months earlier through eight red flags: tightening cash, late supplier payments, social and tax debts, eroding margins, swelling working-capital needs, reliance on overdraft, equity falling below half the share capital, and the loss of key clients. As long as you are not insolvent, confidential tools — ad hoc mandate, conciliation, alert — let you turn things around without publicity.

Most owners discover their difficulties too late, when cash is already dry. Yet French insolvency-prevention law is built on a simple idea: the earlier you act, the more flexible, confidential and effective the tools. The ad hoc mandate and conciliation take place out of sight; judicial reorganisation and liquidation are public and imposed.

The tipping point is legal and precise: insolvency (cessation of payments). Until it is reached, the owner keeps control and chooses their levers. Once crossed, the 45-day clock runs and options narrow. Reading the signs before that point keeps your choice of weapons open.

Read the signs together, not in isolation#

A single sign is not an alert: strained cash in a highly seasonal month is normal. It is the combination and persistence that matter. Three flags lit at once over two quarters — say falling margins, rising working capital and late supplier payments — describe a company sliding toward insolvency. The right tool is not the annual accounts, too late, but a monthly dashboard and a rolling cash forecast. A cash-flow stress test simulating a revenue drop reveals the company's real resilience.

Sign #7 deserves special attention#

The loss of half the share capital is more than a management metric: it is a legal obligation. When, because of losses, equity falls below half the share capital, shareholders must be consulted within four months of the approval of the accounts to decide continuation or dissolution (article L223-42 for the SARL, L225-248 for the SA). Failing regularisation within the next two financial years, any interested party may seek dissolution in court. Ignoring this threshold exposes the director to a management failing.

Insolvency is defined in article L631-1: the inability to meet due liabilities with available assets. Three points:

• available assets are immediately mobilisable funds: cash, credit balances at the bank, and confirmed credit reserves such as an overdraft facility;
• due liabilities are matured debts the creditor can demand immediately;
• a moratorium or grace period granted by a creditor removes the debt from due liabilities: a company that obtains extensions is not necessarily insolvent.

Once insolvency is established, the director has 45 days to declare it to the court (article L631-4), unless they request the opening of a conciliation within that same period. Exceeding the deadline without acting is a fault that can justify a management ban.

The first two tools are the most valuable because they are confidential: neither clients, nor suppliers, nor competitors are informed. The ad hoc mandate (article L611-3) is an amicable negotiation led by an agent appointed by the court president, at the owner's request, with the owner staying in control. Conciliation (articles L611-4 onward) goes further: it can lead to an acknowledged or court-approved agreement, and approval grants new cash contributions a priority (the conciliation, or "new money", privilege).

The statutory auditor's alert procedure (articles L234-1 and L234-2) is triggered as soon as they note a fact likely to compromise the going concern: the director must respond within fifteen days, and the procedure can escalate to the court. Far from a threat, it is a valuable external signal.

• The micro-business with no cost accounting. Without a dashboard, the owner sees losses only at year-end, a year too late. The fix: a simple monthly tracking (cash, margin, social debts) is enough to light the flags in time.
• Growth that is too fast. A fast-growing company can be in difficulty despite a full order book: working capital explodes, cash lags growth. Profitability does not prevent insolvency.
• The single, poorly paying client. Excessive concentration turns a late payment into a vital risk. Dependence on one principal is itself a flag to watch.
• The guarantor director. When the director has guaranteed the company's debts, the company's difficulty becomes a personal asset risk: all the more reason to act early, while amicable tools are available.

• Do not confuse loss and insolvency. A company can be loss-making without being insolvent, and conversely break even yet be unable to pay matured debts. Only cash against due liabilities counts.
• The 45-day deadline is not a reflection period. It is a maximum. The longer you wait, the less accessible conciliation becomes.
• Granted extensions must be formalised. A verbal moratorium offers no protection: only written agreements remove a debt from due liabilities.
• Anticipate the equity threshold. Crossing the half-of-capital threshold requires a shareholder consultation: forgetting it is a fault.

A fit-out client called us on a Friday evening, convinced he was finished: two big projects pushed back, the social-security office demanding payment, the overdraft maxed out. By rebuilding a thirteen-week cash forecast, we saw the company was not yet insolvent — the overdraft facility was a credit reserve, and two clients were due to pay within three weeks. Rather than rush to court, we obtained a staged social-security plan and opened a confidential ad hoc mandate to renegotiate the overdraft. Six months later, the company had recovered, with no client ever knowing.

What this story shows is that panic is a poor adviser. The first thing to do when facing difficulty is not to decide, but to measure: a quantified cash forecast tells you whether you are still on the right side of insolvency, and therefore which tools remain open. That is exactly the role of an outsourced finance director when the company lacks the skill in-house.

Hayot Expertise tip. Put in place today a monthly dashboard and a rolling cash forecast: they are your smoke detectors. At the first trio of persistent flags, have a quantified cash forecast prepared before any decision. As long as you are not insolvent, you keep your choice of confidential tools — that is your most valuable window.