Key Takeaways
- A director who incurs a debt when the company is insolvent, or when there are reasonable grounds to suspect insolvency, is personally liable for that debt under s 588G of the Corporations Act 2001 (Cth).
- The cash flow test (s 95A) is the primary insolvency test: a company is insolvent if it cannot pay its debts as and when they fall due. Balance sheet asset value is secondary.
- Four statutory defences are available under s 588H: reasonable grounds to expect solvency, reliance on a competent officer, illness, and all reasonable steps, but all defences require documented evidence to succeed.
- The safe harbour defence (s 588GA) provides complete protection from insolvent trading liability while a director is pursuing a restructuring course of action that is reasonably likely to lead to a better outcome than immediate administration or liquidation.
- Directors who seek legal advice early, before ATO debts accumulate, before creditor pressure escalates, and before a liquidator is appointed, have significantly more options than those who wait.
When Does Insolvent Trading Actually Become a Director’s Problem?
Under section 588G of the Corporations Act 2001 (Cth), a director has a duty to prevent insolvent trading. Specifically: a director must not allow a company to incur a debt if, at the time the debt is incurred, the company is insolvent or there are reasonable grounds for suspecting it is insolvent.. Our director disputes lawyers also advise on director liability beyond insolvent trading
Breach of that duty creates personal liability. Not company liability, personal liability. The director can be sued by a liquidator for the amount of the debt, and potentially face civil or criminal penalties depending on whether the breach was merely negligent or involved dishonesty.
The trigger is not “I knew the company was insolvent.” The trigger is “there were reasonable grounds to suspect insolvency.” That is a lower threshold than actual knowledge, and courts apply it objectively, what would a reasonable director have known, given what this particular director had access to?
Queensland directors who sit on the boards of companies under financial stress, whether from ATO arrears, creditor pressure, cash flow gaps, or deteriorating trading conditions, need to understand precisely when their personal exposure begins.
What Does “Insolvent” Actually Mean?
The legal definition of insolvency in Australia is found in section 95A of the Corporations Act 2001. A company is solvent if, and only if, it is able to pay all its debts as and when they become due and payable. If it cannot, it is insolvent.
This is the cash flow test, not the balance sheet test. A company can have significant asset value on paper and still be insolvent in the legal sense if it cannot meet its obligations as they fall due. The reverse is also true: a company with a balance sheet in technical deficit may still be legally solvent if it has the cash flow or credit facilities to pay all debts on time.
Courts assess insolvency by reference to the company’s actual financial position at the relevant time, including:
- Cash at bank and available credit facilities
- Debts immediately due (ATO, employee entitlements, trade creditors, lease obligations)
- Debts falling due in the near term
- Whether the company had “pressing” creditors who were not being paid
- Whether the company was relying on inter-company support that could not be guaranteed
The fact that a company is negotiating a payment arrangement with the ATO, or that a creditor has not yet commenced enforcement action, does not mean the company is solvent. If debts exist that the company cannot pay when they fall due, the company is insolvent for the purposes of s 95A and s 588G.
When Reasonable Grounds for Suspicion Arise
Section 588G applies not just when a company is definitively insolvent, but when there are reasonable grounds for suspecting insolvency. This means directors can be personally liable even if the company was not technically insolvent, if a reasonable director in their position would have suspected insolvency.
Queensland courts, applying High Court authority, have identified the following as circumstances giving rise to reasonable grounds for suspecting insolvency:
- Unpaid ATO debt, particularly PAYG withholding, GST, and superannuation guarantee charge that has been deferred or avoided
- Receipt of a Director Penalty Notice from the ATO
- A statutory demand issued under s 459E of the Corporations Act 2001 that the company cannot meet
- Inability to pay trade creditors within their terms, particularly if creditors are pressing
- Bounced cheques or dishonoured direct debits
- Failure to produce monthly management accounts, which courts treat as a sign the director has not turned their mind to the company’s financial position
- Ongoing reliance on related-party loans to meet day-to-day obligations
The presence of one or more of these indicators does not automatically mean a director has breached s 588G, but it starts the clock. From that point, the director needs to take active steps.
The Four Statutory Defences Under s 588H
Section 588H of the Corporations Act 2001 provides four defences that a director can raise to avoid personal liability for insolvent trading. Each defence requires the director to prove specific facts, and all of them depend on documentation.
1. Reasonable Grounds to Expect Solvency (s 588H(2))
The director had reasonable grounds to expect, and did expect, that the company was solvent at the time the debt was incurred and would remain solvent even after incurring the debt. This defence requires the director to point to specific information or advice on which the expectation was based, not simply an optimistic view that things would improve. Board minutes, financial reports, accountant advice, and written cash flow projections are the evidential foundation.
2. Reliance on a Competent and Reliable Officer (s 588H(3))
The director had reasonable grounds to believe, and did believe, that a competent and reliable person was responsible for providing adequate information about the company’s solvency, and that person was fulfilling their responsibilities. This defence is available to non-executive directors and directors who are appropriately informed by a CFO or financial controller, but requires proof that the director actually relied on that person and had reasonable grounds to trust their competence.
3. Illness or Other Good Reason (s 588H(4))
Due to illness or some other good reason, the director did not take part in the management of the company at the relevant time. Serious illness, hospitalisation, or other incapacity may qualify. This defence is narrow and fact-specific.
4. All Reasonable Steps (s 588H(5))
The director took all reasonable steps to prevent the company from incurring the debt, including, if no other reasonable steps were available, taking reasonable steps to appoint a voluntary administrator or provisional liquidator. This is the action-oriented defence: the director moved to protect creditors when they knew the company could not pay.
All four defences share a common requirement: evidence. A director who cannot produce board minutes, financial reports, management accounts, or documented advice has no documentary foundation on which to run a s 588H defence. The decision in Crispino & Ors v Lightowler [2026] VSC 500 confirmed that a bare denial, without cogent evidence, is insufficient to displace the s 588E(4) financial records presumption, and the same principle applies to s 588H defences.
The Safe Harbour Defence: s 588GA
The safe harbour defence — for which our Brisbane insolvency lawyers regularly prepare directors — , introduced into the Corporations Act 2001 by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 and now in s 588GA, was designed to encourage directors to attempt genuine restructuring rather than immediately placing companies into administration.
Under s 588GA, a director is not liable for insolvent trading on a debt incurred during a period when:
- The director had started developing one or more courses of action that were reasonably likely to lead to a better outcome for the company than immediate administration or liquidation; and
- The debt was incurred directly or indirectly in connection with pursuing that course of action.
The safe harbour is not a get-out-of-jail-free card. It requires the director to be actively pursuing a genuine restructuring plan, not simply hoping the situation resolves itself. Indicators that a safe harbour is available include:
- The director has obtained advice from an appropriately qualified restructuring adviser
- The company’s books and records are up to date and accurate
- Employee entitlements (including superannuation under Payday Super from 1 July 2026) are being paid on time
- The director is not dealing with the company in a way that creates unfair advantages for associated parties
If the safe harbour applies, the director has a complete defence for insolvent trading liability on debts incurred during the qualifying period. The moment the restructuring plan is abandoned, or the company’s position becomes clearly irrecoverable, the safe harbour ceases to apply.
Director Penalty Notices and Insolvent Trading: How They Intersect
Director Penalty Notices (DPNs) and insolvent trading liability are distinct legal regimes, but they frequently arise together, and a director facing one is often exposed to both.
A DPN is issued by the ATO under the Taxation Administration Act 1953 (Sch 1, s 269-25) when a company fails to report and pay PAYG withholding, SGC, or GST within the required period. The director becomes personally liable for the tax debt, recoverable from the director directly.
The insolvent trading regime under s 588G is a separate exposure: the director is personally liable to the liquidator for debts incurred when the company was insolvent. ATO debt is frequently the triggering debt that establishes insolvency, and the same ATO arrears that gave rise to the DPN may also form the foundation of an insolvent trading claim.
Under Payday Super (commenced 1 July 2026), directors now face up to 52 DPN exposure windows per year. Each missed super payment is a separate SGC liability. Directors who have not reviewed their super payment obligations since 1 July 2026 should do so immediately.
When to Seek Insolvent Trading Advice in Queensland
The practical answer: earlier than you think you need to.
Directors who seek advice when they first suspect the company may be insolvent, before ATO debts escalate, before a statutory demand arrives, before the company’s bank calls in its facilities, have genuine options. The safe harbour is available. Voluntary administration may rescue the business. Small Business Restructuring under Part 5.3B of the Corporations Act 2001 may eliminate debt and allow the business to continue.
Directors who seek advice after a winding up application has been filed, or after a liquidator has been appointed and is already investigating transactions, have very few options. The insolvent trading liability may have crystallised months or years before the inquiry, and the question becomes how to minimise exposure, not how to avoid it.
The seven warning signs that a director should be seeking legal advice immediately:
- ATO arrears exceeding two quarters of PAYG, GST, or SGC, or any missed Payday Super payment
- A statutory demand received, the 21-day response window is strict
- Director Penalty Notice received, the 21-day response window is equally strict and the consequences of inaction are severe
- Creditors demanding payment outside normal trading terms, or threatening legal action
- The company’s bank placing conditions on existing facilities or reducing access to overdraft
- Management accounts showing a cash flow deficit that cannot be resolved within 60 days without a material change in trading
- The company relying on related-party loans or director loans simply to meet payroll and overhead
Insolvent Trading Advice in Queensland: What a Commercial Lawyer Provides
An experienced Queensland commercial insolvency lawyer advising a director facing potential insolvent trading exposure will typically:
- Assess the company’s financial position and identify the likely date of insolvency for legal purposes
- Review which debts were incurred after that date and the director’s potential exposure
- Assess whether any of the s 588H statutory defences are available and what evidence is required to run them
- Advise on whether the safe harbour under s 588GA is available and what steps must be taken to access and maintain it
- Advise on the merits of voluntary administration, small business restructuring, or creditors’ voluntary liquidation as an alternative to continued trading
- Review any DPN liability and advise on the 21-day response options
- Review related-party transactions that a future liquidator may characterise as voidable under ss 588FA–588FD
The goal is not to avoid legal obligations, it is to ensure that the director has made fully informed decisions, with professional advice, at each stage of the company’s financial difficulty.
Frequently Asked Questions
Can a director be personally liable for insolvent trading even if they did not know the company was insolvent?
Yes. Section 588G of the Corporations Act 2001 applies when there are “reasonable grounds for suspecting” insolvency, a lower threshold than actual knowledge. If a reasonable director in the same position, with access to the same information, would have suspected insolvency, the director can be personally liable even if they did not turn their mind to the company’s financial position.
What is the difference between insolvent trading liability and a Director Penalty Notice?
Insolvent trading liability arises under s 588G of the Corporations Act 2001 and is enforced by a liquidator on behalf of creditors. Director Penalty Notices are issued by the ATO under the Taxation Administration Act 1953 and create personal liability for specific tax debts (PAYG withholding, SGC, GST). Both can arise from the same financial difficulty, and a director may face both simultaneously.
Does resigning as a director protect you from insolvent trading liability?
Resignation does not extinguish liability for insolvent trading that has already occurred. A director remains personally liable for debts incurred during the period they were a director, even after resigning. For DPN purposes, resignation can extinguish non-lockdown DPN liability if done within the relevant period, but has no effect on lockdown DPNs.
What is the safe harbour and how does a director access it?
The safe harbour under s 588GA of the Corporations Act 2001 provides a complete defence to insolvent trading liability for debts incurred while the director is genuinely pursuing a restructuring course of action reasonably likely to lead to a better outcome than administration or liquidation. To access it, a director must obtain restructuring advice, maintain up-to-date financial records, and ensure employee entitlements (including super) are being paid. The safe harbour is not self-executing, it must be actively maintained.
How long does a liquidator have to bring an insolvent trading claim against a director?
Under s 588M of the Corporations Act 2001, a liquidator can bring civil insolvent trading proceedings against a director. The general limitation period under the Limitation of Actions Act 1974 (Qld) is six years for actions founded on contract or tort. For corporate actions, the period may run from the date of the breach (incurring the debt) or the date of liquidation. Directors should obtain specific advice, limitation periods in insolvent trading matters can be complex depending on the facts.
Boss Lawyers advises Queensland directors on insolvent trading liability, safe harbour strategies, Director Penalty Notices, and voluntary administration. If you are concerned about your company’s financial position, contact Mark Harley at 1300 267 711 or via bosslawyers.com.au/contact/.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
