If you’re a company director facing an insolvent trading claim, your personal assets — your home, your savings, your future — are at risk. But there are defences available, and the right legal strategy can protect you.
What Is Insolvent Trading?
Under section 588G of the Corporations Act 2001 (Cth), a company director can be held personally liable for debts incurred by the company at a time when the company was insolvent (or became insolvent by incurring the debt), if the director had reasonable grounds for suspecting insolvency.
In plain terms: if your company was unable to pay its debts as they fell due, and you allowed it to continue trading and incurring new debts, a liquidator can pursue you personally for those debts.
The claims can be enormous — we’ve seen insolvent trading claims ranging from hundreds of thousands to tens of millions of dollars.
Who Can Sue You?
Insolvent trading claims are typically brought by:
- Liquidators — appointed after the company is wound up, with a duty to investigate director conduct and recover funds for creditors
- ASIC — the corporate regulator, which can pursue civil penalty proceedings
- Creditors — in some circumstances, individual creditors can bring claims directly
The Consequences
If an insolvent trading claim succeeds against you:
- Compensation order: You may be ordered to pay an amount equal to the debts incurred during the period of insolvency — from your personal assets
- Civil penalties: Up to $200,000 per contravention
- Criminal penalties: If dishonesty is involved, up to 5 years imprisonment
- Director disqualification: You may be banned from managing companies
- Personal bankruptcy: If you cannot pay the compensation, you may be made bankrupt
Your Defences
The Corporations Act provides several defences to insolvent trading claims:
1. Safe Harbour (Section 588GA)
The most powerful defence available. If you can demonstrate that, after suspecting insolvency, you started developing a course of action that was reasonably likely to lead to a better outcome for the company than immediate administration or winding up, you may be protected.
To qualify for safe harbour, you must have:
- Engaged qualified professional advisors (lawyer, accountant, insolvency practitioner)
- Developed a genuine restructuring plan
- Kept employee entitlements (wages, super, leave) current
- Maintained tax reporting obligations (BAS, tax returns)
- Properly informed yourself of the company’s financial position
- Acted in good faith
2. Reasonable Grounds to Expect Solvency (Section 588H(2))
You had reasonable grounds to expect the company was solvent and would remain solvent. This requires positive evidence — not just hope or wishful thinking.
3. Reasonable Reliance on Others (Section 588H(3)-(4))
You reasonably relied on information from a competent and reliable person (such as an accountant or CFO) that indicated the company was solvent.
4. No Part in Management (Section 588H(5))
Because of illness or some other good reason, you did not take part in the management of the company at the relevant time.
5. All Reasonable Steps (Section 588H(6))
You took all reasonable steps to prevent the company from incurring the debt.
How Boss Lawyers Can Help
At Boss Lawyers, defending directors against insolvent trading claims is a core part of our practice. We have successfully defended directors against claims of $3 million and more using the safe harbour provisions and other statutory defences.
Our approach:
- Immediate assessment of the claim and your exposure
- Forensic review of the company’s financial records to determine solvency at the relevant dates
- Evidence gathering — documenting every step you took as a director
- Defence strategy — identifying the strongest available defences
- Negotiation or litigation — resolving the claim on the best possible terms
Why Choose Boss Lawyers?
- 17+ years of experience in insolvency and commercial litigation
- 3,000+ clients served
- Listed in Doyle’s Guide for litigation
- Principal-led service — Mark Harley handles every matter personally
- Track record of successfully defending directors against multi-million dollar claims
- Commercially pragmatic — we focus on the best outcome, whether that’s dismissal, settlement, or trial
Don’t Wait — Call 1300 267 711
If you’ve received an insolvent trading claim — or even a letter threatening one — time is critical. The earlier you get legal advice, the stronger your defence.
Call 1300 267 711 for a confidential discussion about your position.
Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
The Safe Harbour Defence in Depth: What Section 588GA Actually Requires
The safe harbour provisions, introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 and now contained in section 588GA of the Corporations Act 2001 (Cth), were designed to encourage directors to take active steps to restructure a financially distressed company rather than immediately appointing an external administrator. Used correctly, safe harbour can be a complete defence to an insolvent trading claim — but the requirements are specific and the evidentiary burden is real.
Section 588GA protects a director from insolvent trading liability where, from the time the director first suspects insolvency, they take or start developing a course of action that is reasonably likely to lead to a better outcome for the company than immediate appointment of a voluntary administrator or liquidator.
ASIC’s guidance on safe harbour (Regulatory Guide 217) makes clear that the following conditions are expected to support a valid claim:
- Seek appropriate professional advice promptly. This means engaging a restructuring adviser, experienced insolvency lawyer, or specialist accountant — at the first sign of financial difficulty, not when the situation has become irretrievable. The earlier you act, the more credible the safe harbour claim.
- Develop a genuine restructuring plan. A vague intention to “trade through” is not sufficient. The plan must be documented, identify the company’s financial position and the root causes of distress, and specify concrete steps with realistic timeframes. Generic plans copied from templates are unlikely to satisfy a court examining the defence in hindsight.
- Keep employee entitlements current. Under section 588GA(2), safe harbour is expressly unavailable if the company fails to pay employee entitlements — wages, superannuation contributions, and leave — as they fall due. Unpaid employee entitlements are a hard stop on the defence.
- Maintain tax reporting obligations. BAS lodgements, income tax returns, and other ATO reporting obligations must be kept current. Falling behind with the ATO undermines the safe harbour claim and signals to any future liquidator that the director was not genuinely managing the distress.
- Document the process with contemporaneous records. Safe harbour is not self-executing. Directors must produce evidence that they took these steps at the relevant time — not reconstruct the history after a claim has been filed. Board minutes, adviser correspondence, financial analysis, and restructuring plans are all critical. The time to build that evidence is at the start.
Good Faith Reliance on Your Accountant or Adviser: The Section 588H(b) Defence
Section 588H(3) of the Corporations Act provides a defence where a director relied in good faith on information from a competent and reliable person responsible for providing adequate information about the company’s solvency, and that information indicated the company was solvent.
This defence is frequently raised but often fails because directors cannot produce the evidence needed to support it. To succeed under section 588H(3), you must demonstrate:
- The person was competent and reliable. They must have had the qualifications, experience, and access to information necessary to form a genuine view about the company’s financial position. A general accountant who prepares annual tax returns is not necessarily a competent solvency assessor. Specialist advice from someone who has reviewed the company’s full financial picture carries more weight.
- You received specific information indicating solvency. A general statement that “things look okay” does not meet the threshold. You need to have received, and to be able to produce, a genuine assessment of the company’s solvency — ideally in writing.
- Your reliance was in good faith and reasonable. A director who receives a clean solvency assessment but simultaneously has access to financial information plainly indicating insolvency cannot successfully claim good faith reliance. Courts will examine all the information available to the director at the relevant time. Wilful blindness — deliberately avoiding information that would undermine the clean assessment — does not attract protection.
This defence requires careful preparation of evidence. If you believe your position may involve this defence, documenting the adviser relationship, the information provided, and the basis for your reliance is essential — and should be done as contemporaneously as possible.
If a Liquidator Contacts You: What to Expect and Why Early Legal Advice Is Critical
When a liquidator is appointed, the investigation of director conduct begins quickly. Understanding what this process involves — and how to respond to it — is one of the most important things a director of a failed company can know.
Report as to Affairs (RATA) and book delivery obligations. Under sections 475 and 530A of the Corporations Act, directors are legally required to deliver all books and records of the company to the liquidator and to complete a Report as to Affairs within a specified period. These are mandatory obligations. Failure to comply is a criminal offence, and a director who fails to assist the liquidator without a valid reason faces both criminal exposure and an adverse inference in any subsequent insolvent trading proceedings.
What the liquidator’s investigation covers. The liquidator will reconstruct the company’s financial position over the relevant period to determine when it became insolvent, what debts were incurred after that date, what transactions should be clawed back as voidable, and whether any director or related party should be pursued for recovery. Bank records, ATO data, supplier invoices, and internal financial reports are all part of the reconstruction. Directors who have kept poor records are at a significant disadvantage.
Reporting to ASIC. Under section 533 of the Corporations Act, the liquidator is required to report to ASIC if they believe a director has engaged in conduct that constitutes an offence, is liable for insolvent trading, or should be investigated. An adverse liquidator report can trigger independent ASIC enforcement action — including civil penalty proceedings and director disqualification — separate from any civil claim the liquidator pursues.
Why early legal advice matters above all else. Directors who respond to a liquidator’s initial inquiries without legal advice frequently make statements that are used against them in subsequent insolvent trading proceedings. The liquidator is not your ally — their duty is to creditors, not to directors. Having experienced legal representation from the moment a winding up order is made protects your position, ensures your obligations are properly met, and preserves the strongest possible defences from the outset.
If you are facing an insolvent trading claim or a liquidator’s investigation in Queensland, our insolvency lawyers Brisbane can advise you on your defences, your obligations to the liquidator, and the most effective strategy to protect your personal position. Contact Boss Lawyers on 1300 267 711.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
