When a company starts struggling to pay its bills, directors often do one of two things: hope it resolves itself, or freeze. Neither works. Both can expose you to serious personal liability.
If your company is missing payroll, ignoring ATO demands, or staring down a statutory demand it cannot satisfy, you are already in insolvency territory — whether you have formally acknowledged it or not. The question now is: what can you do, and how do you protect yourself?
This guide is written for Queensland company directors who are confronting that moment. We explain the legal framework, the options on the table, and what happens if you delay.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
What Does It Mean to Be Unable to Pay Debts?
Under section 95A of the Corporations Act 2001 (Cth), a company is solvent if it can pay all its debts as and when they become due and payable. If it cannot, it is insolvent.
Australian courts apply two main tests:
- The cash flow test: Can the company pay its debts as they fall due? This is the primary test. A company that is profitable on paper but cannot meet its obligations when they come in is insolvent.
- The balance sheet test: Does the company have more assets than liabilities? This is a secondary indicator, but not determinative on its own.
Directors are expected to know the difference — and to act once insolvency is reasonably suspected. The law does not require certainty; suspicion of insolvency triggers the obligation to act.
What Are the Warning Signs?
Directors often miss — or ignore — early warning signs that courts and ASIC later treat as clear evidence of known insolvency. Common indicators include:
- Persistent overdue payments to trade creditors
- Bounced cheques or dishonoured direct debits
- Inability to pay employee entitlements (wages, super, leave)
- ATO debt mounting with no realistic repayment plan
- Creditors threatening or issuing statutory demands
- Directors deferring their own salaries to keep cash in the business
- Bank refusing to extend or honour facilities
- Reliance on a single large debtor whose payment is uncertain
The moment these warning signs appear, the clock starts ticking on your personal exposure.
What Is Your Personal Risk as a Director?
This is the question that matters most. If your company fails to pay its debts and ultimately goes into liquidation, you can face:
1. Insolvent Trading Liability (s 588G, Corporations Act)
A director is personally liable for debts the company incurred while insolvent if the director knew — or ought to have known — the company was insolvent when the debt was incurred. Liquidators routinely investigate the period leading up to insolvency and pursue directors personally for recoveries. The liability can be civil, and in serious cases, criminal.
2. Director Penalty Notices (DPNs) from the ATO
The ATO has broad powers to issue Director Penalty Notices making directors personally liable for unpaid PAYG withholding, GST, and SGC superannuation. In 2026, the ATO issued over 84,000 DPNs — a 136% increase on prior years. Once a lockdown DPN is issued (where the company has not lodged BAS returns), the only way to escape liability is to put the company into administration or liquidation. Payment alone does not discharge a lockdown penalty.
3. ASIC Disqualification
Under section 206F of the Corporations Act, ASIC can disqualify a director from managing corporations for up to five years if they were an officer of two or more companies wound up insolvent within a seven-year period. In April 2026, ASIC imposed a five-year ban on a Gold Coast director involved in four failed companies collectively owing more than $3 million to creditors. ASIC enforcement in this area escalated significantly in 2025-2026.
4. Unfair Preference Clawbacks
If the company paid certain creditors — including related parties or the director — in the six months before liquidation, the liquidator can claw those payments back as unfair preferences. Creditors who received payment may be surprised to find themselves as defendants in recovery proceedings.
What Are Your Options as a Director?
When your company cannot pay its debts, several legal pathways exist. The right option depends on the company’s circumstances, the nature of its debts, whether the underlying business is viable, and how much time remains. Act early — most options become unavailable or more limited as the company’s position deteriorates.
Option 1: Negotiate with Creditors Directly
If the cash flow problem is temporary — a large debtor is late, a project payment is delayed — direct negotiation with key creditors may resolve the problem without formal insolvency proceedings. Creditors often prefer a realistic payment arrangement over a winding-up application that recovers cents in the dollar.
This approach works best when: the business is fundamentally viable, the debts are manageable, and the cash flow problem is genuinely short-term. It requires transparent communication and a credible recovery plan.
Option 2: Small Business Restructuring (Part 5.3B, Corporations Act)
Introduced in 2021, the Small Business Restructuring (SBR) regime allows eligible companies to restructure their debts while directors retain control. It is significantly less disruptive than voluntary administration and use of the regime has grown exponentially in 2025-2026.
Eligibility requirements:
- Total liabilities of less than $1 million
- Employee entitlements paid up to date (or arrangements made)
- Tax returns and BAS lodged up to date
- The company has not used SBR or voluntary administration in the past seven years
The company appoints a Small Business Restructuring Practitioner who works with directors to develop a plan for creditors. If creditors vote in favour (by majority in value), the plan binds all unsecured creditors. Directors keep control throughout the process.
Option 3: Voluntary Administration
Voluntary administration is a formal insolvency process where an independent administrator is appointed to take control of the company. The administrator has approximately five weeks to investigate the company’s affairs and present creditors with options at two creditors’ meetings.
The possible outcomes are:
- Deed of Company Arrangement (DOCA): A binding agreement where creditors accept partial payment over time. The company survives and directors may resume control.
- Return to directors: Where the administrator concludes the company is solvent or viable without a DOCA.
- Liquidation: The company is wound up.
Voluntary administration triggers a moratorium on most creditor enforcement, including statutory demands and winding-up applications, giving breathing space to develop a solution. Importantly, a director who appoints an administrator in good faith can rely on the safe harbour defence against insolvent trading claims for debts incurred during the restructuring process.
Option 4: Creditors’ Voluntary Liquidation
If the company has no realistic prospect of recovery, an orderly wind-up is often the most responsible course of action. Creditors’ voluntary liquidation allows directors to initiate the process — rather than waiting for a creditor to force a court wind-up. Directors who act promptly generally face a less adversarial liquidator investigation than those who wait to be wound up.
Option 5: Court-Ordered Winding Up (What Happens If You Do Nothing)
If a creditor issues a statutory demand for $4,000 or more and the company fails to comply within 21 days, the creditor can apply to court to wind up the company. The court will usually grant the order.
Waiting to be wound up by a creditor is the worst position for a director. You lose control of the process, the liquidator’s investigation starts from an adversarial posture, and safe harbour protection is almost certainly gone. This is the outcome to avoid.
The Safe Harbour Defence
The safe harbour defence (s 588GA, Corporations Act) shields directors from insolvent trading liability for debts incurred during a genuine restructuring effort — provided the director:
- Started developing a course of action reasonably likely to produce a better outcome for the company than immediate liquidation;
- Had tax lodgements up to date; and
- Was ensuring employee entitlements were paid.
Safe harbour does not arise automatically. Directors must document that they took deliberate steps toward restructuring — seeking legal advice, engaging a financial advisor, developing a restructuring plan. The protection can be lost if directors fail to maintain these conditions.
The One Thing You Must Not Do
The most dangerous thing a director can do when a company is insolvent is continue trading without a plan. Every new debt incurred after the point of known insolvency increases personal exposure under section 588G. Courts have little sympathy for directors who continued incurring debts knowing — or who should have known — the company could not pay them.
The duty to prevent insolvent trading is personal, non-delegable, and actively enforced by both liquidators and ASIC.
Frequently Asked Questions
Can I be personally sued for my company’s debts?
Generally no — the corporate veil protects directors from company debts. However, if you have traded while insolvent (s 588G), given personal guarantees, or face ATO Director Penalty Notices, your personal assets are at risk.
What is the difference between insolvency and bankruptcy?
Insolvency refers to companies that cannot pay their debts. Bankruptcy is a personal insolvency regime for individuals. A company does not go bankrupt — it is liquidated. A director can face personal bankruptcy if they are personally liable for company debts that they cannot satisfy.
Do I need to resign as a director?
Resignation alone does not remove liability for insolvent trading that occurred before the resignation. In some cases, resignation can actually trigger lockdown DPN liability for ATO debts. Take legal advice before resigning if the company is in financial difficulty.
How quickly do I need to act?
As soon as you suspect insolvency, you must act. Reasonable suspicion is enough to trigger the director’s duty. The earlier you seek advice and begin a restructuring course, the more options remain available and the lower your personal liability.
Can the company keep trading during voluntary administration?
Yes. The administrator can continue trading the company’s business if they believe it is in the interests of creditors to do so while they investigate and develop a proposal.
Get Advice Early
The directors who navigate financial distress best are those who seek legal and financial advice early — before the options narrow and the personal exposure compounds.
Boss Lawyers regularly acts for Queensland directors facing company insolvency. We advise on director liability, safe harbour, statutory demands, voluntary administration, and creditor enforcement. If your company is struggling to meet its obligations, contact us for confidential, practical legal advice.
Boss Lawyers
Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000
Phone: 1300 267 711
Contact us online
See also: Insolvency Lawyers Brisbane | Insolvent Trading and Safe Harbour | Received a Statutory Demand? | ATO Director Penalty Notices 2026
