When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
Importantly, the director does not need to have known the company was insolvent — it is sufficient that there were “reasonable grounds for suspecting” insolvency. This is an objective test. If a reasonable director in the same position ought to have suspected insolvency, the element is satisfied.
What Can Creditors and Liquidators Recover?
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
Section 588G imposes personal liability on a director where:
- The company incurs a debt;
- At the time the debt is incurred, the company is insolvent — or becomes insolvent by incurring the debt;
- At the time the debt is incurred, there are reasonable grounds for suspecting the company is (or would become) insolvent; and
- The director was a director at the time the debt was incurred, and they failed to prevent the company incurring the debt.
Importantly, the director does not need to have known the company was insolvent — it is sufficient that there were “reasonable grounds for suspecting” insolvency. This is an objective test. If a reasonable director in the same position ought to have suspected insolvency, the element is satisfied.
What Can Creditors and Liquidators Recover?
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
A company trades insolvently when it incurs a debt at a time when it is unable to pay all of its debts as and when they become due and payable (the “cash flow” test of insolvency), or when its total liabilities exceed the value of its assets (the “balance sheet” test). The cash flow test is the primary test applied by Australian courts — a company that cannot pay its bills as they fall due is insolvent, even if its balance sheet shows positive net assets.
Common indicators of insolvency include: ongoing losses, inability to pay suppliers on time, dishonoured cheques, reliance on director loans to fund operations, ATO tax debt, creditors threatening or issuing statutory demands, and inability to obtain finance on normal commercial terms.
When is a Director Personally Liable?
Section 588G imposes personal liability on a director where:
- The company incurs a debt;
- At the time the debt is incurred, the company is insolvent — or becomes insolvent by incurring the debt;
- At the time the debt is incurred, there are reasonable grounds for suspecting the company is (or would become) insolvent; and
- The director was a director at the time the debt was incurred, and they failed to prevent the company incurring the debt.
Importantly, the director does not need to have known the company was insolvent — it is sufficient that there were “reasonable grounds for suspecting” insolvency. This is an objective test. If a reasonable director in the same position ought to have suspected insolvency, the element is satisfied.
What Can Creditors and Liquidators Recover?
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
A company trades insolvently when it incurs a debt at a time when it is unable to pay all of its debts as and when they become due and payable (the “cash flow” test of insolvency), or when its total liabilities exceed the value of its assets (the “balance sheet” test). The cash flow test is the primary test applied by Australian courts — a company that cannot pay its bills as they fall due is insolvent, even if its balance sheet shows positive net assets.
Common indicators of insolvency include: ongoing losses, inability to pay suppliers on time, dishonoured cheques, reliance on director loans to fund operations, ATO tax debt, creditors threatening or issuing statutory demands, and inability to obtain finance on normal commercial terms.
When is a Director Personally Liable?
Section 588G imposes personal liability on a director where:
- The company incurs a debt;
- At the time the debt is incurred, the company is insolvent — or becomes insolvent by incurring the debt;
- At the time the debt is incurred, there are reasonable grounds for suspecting the company is (or would become) insolvent; and
- The director was a director at the time the debt was incurred, and they failed to prevent the company incurring the debt.
Importantly, the director does not need to have known the company was insolvent — it is sufficient that there were “reasonable grounds for suspecting” insolvency. This is an objective test. If a reasonable director in the same position ought to have suspected insolvency, the element is satisfied.
What Can Creditors and Liquidators Recover?
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
One of the most significant personal risks facing company directors in Australia is liability for insolvent trading. Under section 588G of the Corporations Act 2001 (Cth), a director who allows a company to incur a debt while the company is insolvent — or where incurring the debt makes the company insolvent — can be held personally liable to compensate creditors for that debt. This is not a theoretical risk: liquidators routinely investigate insolvent trading as part of every liquidation, and recoveries from directors can run into hundreds of thousands of dollars.
What is Insolvent Trading?
A company trades insolvently when it incurs a debt at a time when it is unable to pay all of its debts as and when they become due and payable (the “cash flow” test of insolvency), or when its total liabilities exceed the value of its assets (the “balance sheet” test). The cash flow test is the primary test applied by Australian courts — a company that cannot pay its bills as they fall due is insolvent, even if its balance sheet shows positive net assets.
Common indicators of insolvency include: ongoing losses, inability to pay suppliers on time, dishonoured cheques, reliance on director loans to fund operations, ATO tax debt, creditors threatening or issuing statutory demands, and inability to obtain finance on normal commercial terms.
When is a Director Personally Liable?
Section 588G imposes personal liability on a director where:
- The company incurs a debt;
- At the time the debt is incurred, the company is insolvent — or becomes insolvent by incurring the debt;
- At the time the debt is incurred, there are reasonable grounds for suspecting the company is (or would become) insolvent; and
- The director was a director at the time the debt was incurred, and they failed to prevent the company incurring the debt.
Importantly, the director does not need to have known the company was insolvent — it is sufficient that there were “reasonable grounds for suspecting” insolvency. This is an objective test. If a reasonable director in the same position ought to have suspected insolvency, the element is satisfied.
What Can Creditors and Liquidators Recover?
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
- Section 588G of the Corporations Act 2001 (Cth) imposes personal liability on directors who allow a company to incur debts while insolvent
- Directors can be pursued personally for the full amount of debts incurred during the period of insolvency
- Key defences: safe harbour (s 588GA), reasonable reliance on another person, absence from management, illness/other good reason
- Liquidators can bring insolvent trading claims; so can creditors in some circumstances (with leave of the Court)
- Early action — before the company becomes insolvent — is the most effective protection for directors
Insolvent Trading — Director Liability Under Section 588G
One of the most significant personal risks facing company directors in Australia is liability for insolvent trading. Under section 588G of the Corporations Act 2001 (Cth), a director who allows a company to incur a debt while the company is insolvent — or where incurring the debt makes the company insolvent — can be held personally liable to compensate creditors for that debt. This is not a theoretical risk: liquidators routinely investigate insolvent trading as part of every liquidation, and recoveries from directors can run into hundreds of thousands of dollars.
What is Insolvent Trading?
A company trades insolvently when it incurs a debt at a time when it is unable to pay all of its debts as and when they become due and payable (the “cash flow” test of insolvency), or when its total liabilities exceed the value of its assets (the “balance sheet” test). The cash flow test is the primary test applied by Australian courts — a company that cannot pay its bills as they fall due is insolvent, even if its balance sheet shows positive net assets.
Common indicators of insolvency include: ongoing losses, inability to pay suppliers on time, dishonoured cheques, reliance on director loans to fund operations, ATO tax debt, creditors threatening or issuing statutory demands, and inability to obtain finance on normal commercial terms.
When is a Director Personally Liable?
Section 588G imposes personal liability on a director where:
- The company incurs a debt;
- At the time the debt is incurred, the company is insolvent — or becomes insolvent by incurring the debt;
- At the time the debt is incurred, there are reasonable grounds for suspecting the company is (or would become) insolvent; and
- The director was a director at the time the debt was incurred, and they failed to prevent the company incurring the debt.
Importantly, the director does not need to have known the company was insolvent — it is sufficient that there were “reasonable grounds for suspecting” insolvency. This is an objective test. If a reasonable director in the same position ought to have suspected insolvency, the element is satisfied.
What Can Creditors and Liquidators Recover?
The liquidator can bring a claim against a director for compensation equal to the amount of loss suffered by creditors as a result of the insolvent trading. In practice, this is calculated as the amount of unsecured debts incurred during the period of insolvency that were not paid. Where there were multiple directors, each director can be jointly and severally liable for the full amount.
In addition to civil liability, directors who engage in insolvent trading dishonestly can face criminal prosecution under section 588G(3), carrying penalties of up to 15 years’ imprisonment and/or a fine of up to 4,500 penalty units (as at 2026).
Defences to an Insolvent Trading Claim
The Corporations Act provides several defences to an insolvent trading claim:
| Defence | Section | What it requires |
|---|---|---|
| Safe Harbour | s 588GA | Director developed or was developing a restructuring plan reasonably likely to lead to a better outcome than immediate administration or liquidation |
| Reasonable reliance on information | s 588H(b) | Director had reasonable grounds to expect (based on information provided by a competent person) that the company was solvent |
| Did not participate in management | s 588H(c) | Director did not take part in management of the company at the time the debt was incurred (due to illness or other good reason) |
| Took all reasonable steps to prevent | s 588H(d) | Director took all reasonable steps to prevent the company incurring the debt, including appointing an administrator |
Safe Harbour — The Key Modern Defence
The safe harbour provisions (section 588GA), introduced in 2017, provide the most important modern defence to insolvent trading. If a director develops or is developing a restructuring plan that is reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation, liability for debts incurred in pursuing that plan is suspended. To access safe harbour, directors must:
- Take the course of action from the time they first suspect (or ought to suspect) insolvency
- Ensure the company is meeting its tax reporting obligations
- Ensure employee entitlements are being paid (or arrangements are in place)
- Obtain appropriate advice (financial, legal or restructuring)
- Keep proper financial records
Safe harbour is not automatic — it must be actively established and maintained. Documentation of the restructuring plan and the advice received is critical.
Real Consequences — What Happens in Practice
When a liquidator investigates a company’s affairs, one of their primary tasks is to identify the date the company became insolvent and quantify debts incurred after that date. Liquidators can access company books and records, examine directors and officers under oath (section 596A examinations), and seek orders for the production of documents. Where insolvent trading is established, liquidators will typically send a letter of demand to directors and, if not resolved, commence proceedings in the Federal Court or Supreme Court.
Boss Lawyers has experience acting for liquidators in complex recovery matters — including cases involving sophisticated sham transactions, round-robin payment arrangements, and attempts by directors to impede the liquidation. We also act for directors who receive insolvent trading demands and need to assess their position and available defences.
How to Protect Yourself as a Director
- Monitor solvency regularly — do not wait for a crisis; review cashflow forecasts monthly
- Act early — if there are warning signs, seek legal and financial advice immediately
- Document your decisions — keep board minutes and written records of decisions to continue trading
- Consider safe harbour — if restructuring may be possible, formalise the process and get advice
- Consider voluntary administration — if restructuring is not viable, voluntary administration may be the appropriate step
- Do not prefer related parties — paying related-party creditors ahead of others in the lead-up to insolvency creates additional exposure
Frequently Asked Questions
Can a creditor directly sue a director for insolvent trading?
Yes — but only with the leave of the Court, and only if the liquidator has not already brought a claim or has given written consent. Under section 588R of the Corporations Act, a creditor can make an application to the Court to pursue a director directly for the debt incurred to them as a result of insolvent trading. In practice, most insolvent trading claims are brought by liquidators, not individual creditors.
How far back can a liquidator look for insolvent trading?
There is no fixed look-back period for insolvent trading under section 588G. The liquidator will investigate from the date the company first became insolvent — which can be months or even years before formal insolvency proceedings began. In complex matters, financial experts are engaged to identify the “date of insolvency” — a contested factual and legal question that is often the central issue in insolvent trading litigation.
What if I resigned as a director before the company went into liquidation?
Resignation does not automatically extinguish insolvent trading liability. You remain liable for debts incurred while you were a director — so if the company was insolvent during your tenure and debts were incurred in that period, a liquidator can still pursue you after you have resigned. Resignation may, however, be relevant to the “did not participate in management” defence if the circumstances warrant.
How Boss Lawyers Can Help
Insolvent trading is a high-stakes area of law. The consequences for directors — financial ruin, disqualification from managing corporations, and in serious cases criminal prosecution — are severe. Whether you are a director seeking to understand your obligations and protect your position, or a liquidator or creditor pursuing a recovery, expert legal advice is essential.
Mark Harley, Principal Solicitor, has over 17 years’ experience in commercial litigation and insolvency. Boss Lawyers regularly acts in matters involving director liability, liquidator investigations, section 596A examinations, and complex recovery proceedings. We focus on strategic, commercially-driven outcomes — not billable hour padding.
For related guidance, see our pages on Safe Harbour Provisions for Directors, Director Disputes, and Insolvency Lawyers Brisbane.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Contact Boss Lawyers today: 1300 267 711 | Get in Touch
Mark Harley | Principal Solicitor | Boss Lawyers Pty Ltd | Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000