Understanding a valid insolvent trading defence in Queensland — and across Australia — just got sharper thanks to a landmark Victorian Supreme Court decision handed down in December 2025. In Re Gemwood Projects Pty Ltd (in liq) [2025] VSC 819, Justice Croft dismissed a liquidator’s insolvent trading claim against a director, removed the liquidator from office for misleading conduct, and ordered repayment of settlements already extracted from the ATO and State Revenue Office (SRO). This is one of the most instructive insolvency lawyers‘ reading of 2025 — and the matter is on appeal.
Background: What Happened in Re Gemwood Projects?
From 1999, the Georgiou family operated a commercial cabinetry business through Gemwood Projects Pty Ltd (the Company). From 8 August 2016, the Company traded as trustee of the Gemwood Projects Discretionary Trust. Mr Emilios Georgiou was the sole director and also a principal beneficiary of the Trust.
Critically, Mr Georgiou regularly provided third-party funding to the Company through his own entity — E&C Georgiou Nominees Pty Ltd as trustee for the Emilios Georgiou Trust — to extinguish the Company’s debts as they arose. This pattern of related-entity support would become the centrepiece of the entire dispute.
By 2018, the Company owed the ATO and SRO in excess of $600,000. Mr Georgiou did not step in to assist at this point, as the Company already owed him approximately $3.6 million. On 4 July 2019, Mr Georgiou placed the Company into voluntary liquidation.
The liquidator investigated and identified potential unfair preference claims: $432,731 paid to the ATO and $120,622 paid to the SRO during the relation-back period. The liquidator settled with the SRO for $72,000 in December 2020, and with the ATO for $310,000 in mid-2021 — but, as the Court would later find, the way those settlements were negotiated was deeply problematic.
Armed with those settlements, the liquidator then brought an insolvent trading claim against Mr Georgiou under section 588G(2) of the Corporations Act 2001 (Cth). Mr Georgiou fought back — and won on almost every front.
The Insolvent Trading Claim — Why It Failed
Section 588G of the Corporations Act imposes personal liability on directors who allow a company to incur debts while insolvent. The threshold question is always: was the company insolvent at the relevant time?
Solvency is defined in section 95A: a person is solvent if, and only if, they are able to pay all their debts as and when they become due and payable. A person who is not solvent is insolvent.
Justice Croft, applying the principles from Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation and Australian Securities and Investments Commission v Plymin (No 1), emphasised that the Court must consider the commercial realities facing the company. Mere failure to pay debts on time is not determinative — what matters is whether the company had the resources available to discharge its liabilities.
The answer in Gemwood’s case: yes. The Company had access to third-party funding from Mr Georgiou’s related entity at all relevant times. It could have called on those funds to pay its debts. The fact that Mr Georgiou chose not to exercise that funding at the critical period in 2018 — while the Company already owed him $3.6 million — did not render the Company unable to pay. It was a commercial choice, not an incapacity.
The insolvent trading claim failed entirely.
The “Can’t Pay” vs “Won’t Pay” Distinction
This is the conceptual heart of the Gemwood decision — and it is one that directors, accountants, and director duties advisers should understand precisely.
Australian insolvency law asks whether a company is unable to pay its debts. The word “unable” does real work. A company that has access to funding — whether from its own assets, from credit facilities, or from related-entity support under common control — but elects not to deploy that funding, is not necessarily insolvent. Choosing not to pay is fundamentally different from being incapable of paying.
The practical implications of this distinction are significant:
- Selective payment of creditors — prioritising some creditors over others — is a business decision, not proof of insolvency.
- Delayed payments — even where they become an industry norm — do not automatically establish that a company cannot pay.
- Related-entity funding — where a director or associated entity has consistently propped up the company and has the capacity to continue doing so — can be counted as a resource available to the company in the solvency analysis.
Justice Croft’s approach aligns with the commercial reality that many small and medium enterprises operate with the implicit (and sometimes explicit) backing of related entities. The Corporations Act is not designed to punish directors for ordinary commercial decision-making about the order in which debts are paid — it targets situations where the company genuinely cannot meet its obligations.
For directors in Queensland and across Australia who have received financial support from related entities, this case provides a meaningful analytical framework for contesting insolvent trading allegations.
The Voidable Transaction Claims — Also Substantially Failed
The preference recovery claims that the liquidator had already settled — $310,000 from the ATO and $72,000 from the SRO — were built on the same premise: that the Company was insolvent when the payments were made. Once the Court determined the Company was solvent due to available related-entity funding, the foundation of those preference claims crumbled.
Voidable transactions under Division 2 of Part 5.7B of the Corporations Act — including unfair preferences (s 588FA), uncommercial transactions (s 588FB), and unfair loans (s 588FD) — generally require the company to have been insolvent at the time of the transaction. Where solvency is established, the transaction cannot be unwound as a preference.
The Gemwood case reinforces that a liquidator investigating director-related transaction clawbacks must rigorously test the solvency question before asserting — let alone settling — preference claims. Getting it wrong does not just mean losing at trial. As this case demonstrates, it can mean losing your appointment entirely.
The Liquidator Removed — A Warning to Practitioners
The removal of the liquidator is the most striking aspect of the Gemwood decision, and the aspect most likely to reverberate through the insolvency profession.
Justice Croft noted that “serious allegations” were made against the liquidator, and accordingly applied the Briginshaw standard — the heightened civil standard derived from Briginshaw v Briginshaw (1938) 60 CLR 336, where proof must generate a real degree of persuasion commensurate with the gravity of the allegation. The Court also acknowledged the authorities cautioning against readily removing liquidators.
Despite that high bar, the liquidator’s own concessions in cross-examination were fatal:
- The liquidator admitted accepting the lower ATO offer ($310,000 rather than $350,000) specifically to avoid triggering the contractual obligation to notify Mr Georgiou — because notification might have prompted Mr Georgiou to raise questions about whether the Company was actually insolvent.
- In negotiating the SRO settlement, the liquidator disclosed a statutory demand against the Company for $381,298.84 — but failed to disclose that $433,000 had already been paid to the ATO during the relevant period, which would have materially altered the SRO’s assessment.
- The liquidator failed to disclose to either the ATO or SRO that the Company had a consistent history of receiving third-party funding from Mr Georgiou — information directly relevant to the solvency question underpinning the preference claims.
Justice Croft found the liquidator breached multiple obligations under the Civil Procedure Act 2010 (Vic):
- Section 16 — the overarching obligation to further the administration of justice
- Section 17 — the obligation to act honestly
- Section 18 — not to make a claim without proper basis
- Section 21 — not to mislead or deceive
- Section 24 — to ensure costs are reasonable and proportionate
The liquidator was removed, ordered not to recover remuneration and expenses from the proceeding, and the matter was referred to ASIC. The preference settlements with the ATO and SRO — extracted through misleading correspondence — were also ordered to be repaid.
This outcome is extraordinary. Courts are generally reluctant to remove liquidators, recognising the disruption this causes to administrations. The threshold was met here because the liquidator’s own testimony confirmed deliberate concealment of material information from counterparties in settlement negotiations. That is not a grey area.
What Does This Mean for Directors?
If you are a director who has received financial support from a related company, trust, or associated entity — particularly one under common control — the Gemwood decision is directly relevant to you. Key takeaways:
- Related-entity funding can support a solvency defence. If a related entity had the capacity and a consistent history of funding the company, and that funding was available to be called upon, a liquidator may struggle to establish insolvency at the relevant time.
- Solvency is assessed at the time of each transaction. The question is always whether the company could have paid, not whether it did pay. Evidence of payment patterns, available funding sources, and director conduct is all relevant.
- Directors should document funding arrangements. Loan agreements, board resolutions, and contemporaneous records of related-entity support can be critical evidence in any future insolvent trading dispute.
- Challenge the solvency analysis early. If a liquidator asserts insolvent trading, examine the methodology. If the liquidator has ignored available funding sources or conflated “won’t pay” with “can’t pay,” that is a viable defence.
- Seek legal advice before a liquidator’s proceeding is filed. Once proceedings are on foot, costs escalate rapidly. Early engagement with experienced commercial lawyers can identify defences and potentially resolve matters without protracted litigation.
What Does This Mean for Liquidators?
The Gemwood decision is a sobering reminder that a liquidator’s obligations extend beyond recovering assets for creditors. Liquidators are officers of the Court. They owe duties of honesty and candour that apply not just in formal proceedings but in settlement negotiations.
Practically, liquidators and their advisers should:
- Rigorously investigate solvency before asserting preference claims. The availability of related-entity funding, group-level cash flow, and director loan accounts are all part of the solvency picture. Ignoring them creates a fragile claim.
- Disclose material information in preference recovery correspondence. Settlement demands and correspondence must not be misleading by omission. If you know something that would materially affect the counterparty’s assessment of the claim’s merits, disclose it.
- Do not structure settlements to avoid notification obligations. Deliberately engineering a deal to prevent a director from finding out about a preference claim — especially where that director may have a legitimate solvency defence — is a serious breach of duty.
- Apply the “can’t pay / won’t pay” distinction before filing. Selective payment of creditors, delayed payments in a particular industry context, and the existence of related-entity funding must all be considered before concluding a company was insolvent.
- ASIC referral is a real outcome. Gemwood demonstrates that serious misconduct in the conduct of a liquidation will be referred to the regulator. Removal from an administration is damaging. An ASIC investigation is career-altering.
The Appeal — Watch This Space
The Gemwood decision is currently on appeal. The outcome of that appeal will be significant. If the Court of Appeal upholds Justice Croft’s findings — particularly on the solvency analysis and the “can’t pay / won’t pay” distinction — the decision will carry even greater persuasive weight in Queensland and other jurisdictions.
If the appeal modifies the reasoning, it may narrow the circumstances in which related-entity funding can ground a solvency defence. Either way, practitioners and directors should watch this matter closely.
Boss Lawyers will update this post when the appeal is decided.
Key Takeaways
- “Can’t pay” is not the same as “won’t pay”: Insolvency requires genuine inability to pay debts. Selective payment of creditors, or a choice not to deploy available funding, is not insolvency.
- Related-entity funding matters: Where a director or related entity has consistently funded the company and has capacity to continue doing so, that funding forms part of the company’s available resources for solvency purposes.
- Preference claims built on flawed solvency analysis will fail: Liquidators who assert insolvency without rigorously testing the solvency question — including related-entity funding sources — are building on sand.
- Liquidator honesty is non-negotiable: Misleading conduct in preference settlement negotiations — even by omission — can result in removal, denial of remuneration, repayment orders, and ASIC referral.
- Directors have real defences: Insolvent trading is not automatic simply because a company went into liquidation with unpaid creditors. The legal analysis is fact-specific and the Gemwood decision shows the standard is high.
- The appeal could change everything: This area of law is live and developing. Advice should reflect the current state of the law as it evolves.
Frequently Asked Questions
What is insolvent trading?
Insolvent trading occurs when a director allows a company to incur a debt at a time when the company is insolvent, or when incurring the debt will cause it to become insolvent: section 588G of the Corporations Act 2001 (Cth). A company is insolvent if it is unable to pay all its debts as and when they become due and payable (section 95A). If found liable, a director can be ordered to personally compensate creditors for the debt incurred. Penalties for contravention of the civil penalty provision (s 588G(2)) can reach $200,000 or more, and criminal liability may arise where the director was dishonest.
What is the defence for directors where a related entity has provided funding?
Where a director or a related entity under common control has consistently provided funding to a company — and had the capacity and inclination to continue doing so — that funding may be counted as a resource available to the company in the solvency analysis. If the company could have called on those funds to pay its debts, it may not have been “unable to pay” under section 95A, even if it did not actually pay. This is the principle emerging from Re Gemwood Projects. The strength of this defence depends on the facts: the history, consistency, and availability of the funding, and whether it was truly accessible at the relevant time, are all critical.
What are voidable transaction claims?
Voidable transactions are transactions entered into by a company before it is wound up that a liquidator can seek to unwind and recover for the benefit of creditors. They include unfair preferences (payments to creditors when the company was insolvent that give that creditor an advantage over others), uncommercial transactions (transactions on uncommercial terms), unfair loans, and transactions to defeat creditors. They are governed by Division 2 of Part 5.7B of the Corporations Act. Most voidable transaction claims require the company to have been insolvent at the time of the transaction — which is why the solvency finding in Gemwood was fatal to the preference claims.
What happens if a liquidator is removed?
A Court may remove a liquidator under section 503 of the Corporations Act where it is just and equitable to do so. Grounds include conflicts of interest, misconduct, lack of independence, incompetence, or — as in Gemwood — dishonest or misleading conduct. Removal typically results in the appointment of a replacement liquidator. Beyond removal, the Court can deny the liquidator their remuneration and expenses, order repayment of amounts improperly recovered, and refer the matter to ASIC for investigation of the liquidator’s registration. For the liquidator, the reputational and financial consequences can be severe.
The Gemwood decision is a significant development for directors, insolvency practitioners, and their advisers in Queensland and across Australia. Whether you are a director facing an insolvent trading claim, an accountant advising a client whose company is under investigation, or an insolvency practitioner managing your obligations on a complex liquidation, the principles in this case are directly relevant. Boss Lawyers regularly acts in commercial insolvency disputes, insolvent trading proceedings, and director liability matters. If you have questions about how this decision affects your position, call Mark Harley on 1300 267 711 or visit bosslawyers.com.au.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
