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Most directors understand — at least in broad terms — that they owe duties to their company. What is far less well understood is what happens to those duties when the company starts running out of money. As a company slides toward insolvency, the calculus changes: the people whose interests matter most are no longer the shareholders. They are the creditors.
The 2025 Supreme Court of South Australia decision in Ex NF Pty Ltd (in liq) v Munneke [2025] SASC 165 is the most significant recent judicial examination of exactly this question. It confirmed that once there is a real and not remote risk of insolvency, directors must redirect their loyalty — and it delivered a series of findings that every Australian director should take seriously.
This post unpacks the decision, explains the legal framework, and sets out what Queensland directors need to do differently as a result.
The Director’s Duty Under the Corporations Act
The Core Duties: Sections 180–182
The primary directors’ duties in Australia are found in Part 2D.1 of the Corporations Act 2001 (Cth). The key provisions are:
- Section 180 — the duty to exercise care and diligence. A director must act with the degree of care and diligence that a reasonable person in their position would exercise.
- Section 181 — the duty of good faith. A director must act in good faith in the best interests of the corporation and for a proper purpose.
- Section 182 — no improper use of position. A director must not use their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation.
In the ordinary course of business, “best interests of the corporation” is understood to mean the best interests of shareholders as a whole. That interpretation is well-established. But it is not absolute.
The Creditor Duty: A Shift in Who Matters
Australian courts have long recognised that as a company approaches insolvency, the interests of creditors become increasingly important — and at some point, they override the interests of shareholders altogether. This is sometimes called the “creditor duty” or the duty that arises in the zone of insolvency.
The rationale is straightforward: when a company is solvent, shareholders bear the residual economic risk — if things go wrong, they lose their investment. When a company is insolvent or near-insolvent, it is the creditors who bear the real economic risk. The company’s assets are, in effect, a fund for the benefit of creditors. A director who depletes that fund — or authorises transactions that diminish creditors’ ability to recover what they are owed — is using someone else’s money to benefit shareholders.
Section 588G: Insolvent Trading — Related but Distinct
Section 588G of the Corporations Act 2001 (Cth) is the insolvent trading prohibition: a director must not allow the company to incur a debt when the company is already insolvent or will become insolvent by incurring it. This is a separate cause of action from the creditor duty under section 181, though the concepts often overlap in practice. The key distinction is that section 588G applies to the incurring of specific debts, whereas the broader creditor duty applies to the director’s overall conduct in managing the company’s affairs when solvency is at risk.
The Munneke Decision: Key Facts
In Ex NF Pty Ltd (in liq) v Munneke [2025] SASC 165, the liquidator of a company brought proceedings against its director for breach of duties under sections 180, 181 and 182 of the Corporations Act 2001 (Cth).
During a period when the company was facing a real and not remote risk of insolvency, the director authorised a series of significant transactions — involving cryptocurrency assets and property dealings — that had the effect of reducing the assets available to creditors. Critically, those transactions had been approved or ratified by the shareholders.
The director relied heavily on two lines of defence: first, that the shareholders had approved the transactions; and second, that they had engaged an accountant and relied on professional advice, and therefore could not be personally at fault.
The court rejected both defences.
What the Court Decided
The decision turned on four core holdings, each of which has significant practical implications.
1. The Duty Shifts When There Is a Real and Not Remote Risk of Insolvency
The court confirmed that the creditor duty arises — and section 181’s “best interests” obligation shifts to encompass creditors — when the company faces a real and not remote risk of becoming insolvent. Directors cannot simply wait until the company is technically insolvent before adjusting their conduct. The obligation arises earlier.
2. Shareholder Ratification Cannot Cure Conduct Adverse to Creditors
This is perhaps the most important finding in Munneke for practical governance purposes. The court held that shareholders have no power to ratify director conduct that is adverse to the interests of creditors in the zone of insolvency. This fundamentally limits the protective effect of seeking shareholder approval once solvency is genuinely at risk.
The logic tracks the underlying rationale for the creditor duty: the shareholders have no right to direct or ratify the dissipation of what is effectively the creditors’ fund. Their approval is simply irrelevant to the question of whether the director breached their duty.
3. Transactions That Prejudice the Company’s Ability to Pay Debts Breach Sections 180–182
The court found that transactions which reduce the company’s capacity to pay its debts — even if they might otherwise have been commercially justifiable in a solvent company — will breach the duties in sections 180 to 182 when the company is in the zone of insolvency. It is not sufficient to say that the transaction had a legitimate commercial rationale. The question is: did it harm creditors? If so, it was a breach.
4. Delegating Financial Oversight Does Not Remove Personal Responsibility
The director’s reliance on an accountant and external advisors provided no defence. The court was clear: a director cannot discharge their duty simply by handing financial oversight to someone else. Directors retain personal responsibility for understanding the company’s financial position and ensuring that their decisions are made with that understanding in mind. Delegation may satisfy part of the due diligence obligation in appropriate cases — but it does not transfer the director’s personal liability.
Sliding Scale or Hard Trigger? The Australian Position
One of the more technically interesting aspects of Munneke is the court’s engagement with the debate about when exactly the creditor duty is triggered.
In the United Kingdom, the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25 accepted a sliding scale approach: the weight given to creditors’ interests increases gradually as the company moves from solvency toward insolvency. Under this model, there is no single trigger moment — directors must begin to take creditors into account as insolvency becomes more likely, and the weighting shifts progressively.
Australian courts have not yet definitively resolved whether the same sliding scale applies here, or whether Australian law adopts a hard trigger — a binary point at which the creditor duty either applies or does not. Munneke engaged with this debate and provided guidance, without definitively settling it.
The practical implication of this uncertainty is important: directors should not treat the zone of insolvency as a narrow or precisely defined threshold. If there is any genuine, real and not remote risk that the company may become insolvent, directors should be treating the creditor duty as live and operative. Waiting for certainty about where the threshold lies is not a viable strategy — and in litigation, it will not be a successful one.
What This Means for Queensland Directors
If you are a director of a Queensland company that is experiencing financial difficulty — declining revenue, mounting creditor pressure, overdue tax obligations, or a shrinking cash runway — Munneke is directly relevant to your personal exposure. Here is what it means in practice.
You Must Understand Your Company’s True Financial Position
Directors cannot operate in wilful ignorance of the company’s finances. You are entitled to rely on reports and advice from management, accountants, and advisors — but you must actively engage with that information. If you sign off on a significant transaction without understanding whether the company has the capacity to absorb it, you are exposed.
Request updated management accounts before every major board decision. Ask the hard questions. If the answers are not satisfactory, push back. Document that you did.
Shareholder Approval Does Not Protect You
Many directors — particularly in closely held companies or family groups — treat shareholder approval as a form of legal protection. Munneke has confirmed that this protection evaporates once the company enters the zone of insolvency. Creditors’ interests cannot be compromised by a shareholder resolution. If you are authorising transactions that reduce the company’s ability to pay its creditors, no shareholder vote will protect you from personal liability.
Document Your Decision-Making
Boards should be recording — in board minutes or written resolutions — how they assessed the company’s solvency at the time of every major decision. This is not bureaucracy for its own sake; it is evidence. If a liquidator later challenges a transaction, the first thing they will examine is whether the board turned its mind to the company’s financial position at the time. A clear contemporaneous record of that analysis is your best defence.
The Zone of Insolvency Is Earlier Than Most Directors Think
The threshold is not: “we are unable to pay our debts as they fall due.” It is: “there is a real and not remote risk that this might happen.” That is a substantially earlier point. Directors consistently underestimate how early the creditor duty kicks in — and the consequences of that underestimation fall on them personally.
Get Legal Advice Early
The time to engage insolvency lawyers in Brisbane is not when the company has already failed. It is when you first see the warning signs: creditor pressure increasing, cash flow tightening, major debtors not paying, or the business model facing structural headwinds. Early advice allows you to take protective steps, document your reasoning, and structure any necessary transactions in a way that protects both the company and you personally.
If director liability or creditor claims are already in issue, early advice from lawyers experienced in director disputes in Brisbane is essential.
Frequently Asked Questions
When does a director’s duty shift to creditors in Australia?
Under Australian law, a director’s duty begins to extend to creditors — not just shareholders — when the company faces a real and not remote risk of becoming insolvent. This is confirmed by Ex NF Pty Ltd (in liq) v Munneke [2025] SASC 165. The precise trigger point is not yet definitively settled (the courts have not resolved whether a sliding scale or hard trigger applies), but directors should treat the duty as operative as soon as genuine financial difficulty emerges.
Can shareholders ratify decisions that harm creditors?
No. The Munneke decision confirmed that shareholders cannot ratify director conduct that is adverse to creditors’ interests when the company is in the zone of insolvency. Once the creditor duty is engaged, shareholders have no authority to override it. Their approval of a harmful transaction is legally irrelevant to the director’s liability.
What is the “zone of insolvency”?
The zone of insolvency refers to the period during which a company is approaching — but may not yet have reached — technical insolvency (the inability to pay debts as they fall due). It is the period during which the risk of insolvency is real and not remote, and during which directors must begin to treat creditors’ interests as paramount. There is no single defined entry point; it depends on the company’s specific financial circumstances.
What is the difference between the section 181 duty and insolvent trading under section 588G?
Section 181 of the Corporations Act 2001 (Cth) imposes a general duty on directors to act in good faith and in the best interests of the corporation — which, in the zone of insolvency, includes the interests of creditors. Section 588G is a specific prohibition on allowing a company to incur debts when it is insolvent or will become insolvent as a result. Both provisions can be engaged in an insolvency scenario, but they operate differently: section 588G focuses on specific debt-incurring transactions, while the section 181 creditor duty applies to the director’s overall governance conduct.
Speak with Boss Lawyers
If your company is facing financial difficulty, or if you are concerned about your personal exposure as a director, do not wait. The window to take protective action closes quickly — and, as Munneke confirms, the obligations begin earlier than most directors realise.
Mark Harley, Principal Solicitor at Boss Lawyers, is experienced in acting for directors, liquidators, and creditors in insolvency and director liability matters. Call us on 1300 267 711 or use the contact form to arrange a consultation.
Boss Lawyers Pty Ltd
Level 27, Santos Place
32 Turbot Street, Brisbane QLD 4000
ABN 38 143 136 645
1300 267 711
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This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
