What Directors Must Do When a Company Is in Financial Difficulty: A Queensland Guide

When a Queensland company cannot pay its debts, directors face personal liability risks under the Corporations Act 2001 (Cth) that grow with every day of inaction. The gap between “the company is struggling” and “the company is insolvent” is where directors get into the most trouble. They keep trading, keep incurring debts, and keep hoping things turn around, while the law is quietly building a personal liability case against them.

This guide is for the director who got off the phone with their accountant tonight and heard words like “cash position,” “ATO debt,” and “I’m not sure we can make next month’s payroll.” It explains what the law actually requires, what your options are, and what you need to do right now.

If you need to speak to someone tonight or first thing tomorrow, call Boss Lawyers on 1300 267 711.

How Do You Know When Your Company Is in Financial Difficulty?

The legal test for insolvency under s 95A of the Corporations Act 2001 (Cth) is a cash flow test: a company is solvent if it can pay all its debts as and when they become due and payable. The moment it cannot, it is legally insolvent. This applies regardless of what the balance sheet says or the value of assets on paper.

Financial difficulty is the warning zone before that line is crossed. Here are seven signs your company may already be there:

1. Creditors are being paid late or not at all. If you are rotating which supplier gets paid each month, or asking for extended terms because you have no choice, that is a red flag. Creditors being paid beyond agreed terms is a classic indicator of the cash flow problem the s 95A test is designed to catch.
2. ATO debt is accumulating. Unpaid PAYG withholding or GST that is rolling over from quarter to quarter is not just a cash flow problem. It is a Director Penalty Notice waiting to happen. The ATO does not need to sue through court in the same way a trade creditor does. It can issue a DPN and come directly for you personally.
3. Operations are running on overdraft or personal credit cards. Using short term credit to fund the day to day running of the business is a sign the business cannot sustain itself from its own revenue. This is a structural cash flow problem, not a timing issue.
4. Refinancing has been declined or is unavailable. If the bank has said no, or you have maxed out available facilities, the external market has already made a judgment about your company’s financial position.
5. Key creditors are threatening legal action. Statutory demands, letters of demand, or threats of winding up applications mean the window for informal resolution is narrowing fast.
6. Payroll is only being met by director loans. If you are personally funding the company’s wage bill, you are subsidising an insolvent business. That is not a long term solution, and the law does not treat it as one.
7. Your 90 day cash flow forecast shows a shortfall. If you have run the numbers and you cannot see how the company pays its bills over the next 90 days, you are looking at insolvency risk, not just a short term cash flow squeeze.

If two or more of those apply to your company right now, you are in financial difficulty. The question is what you do next.

The Personal Liability Trap: What the Law Says

This is the section most directors wish they had read six months earlier.

Section 588G of the Corporations Act 2001 (Cth) imposes personal liability on a director for insolvent trading. To establish liability, three elements must be satisfied:

1. The company was insolvent at the time the debt was incurred, or became insolvent by incurring it;
2. At that time, there were reasonable grounds for suspecting the company was insolvent or would become insolvent; and
3. The director caused the company to incur the debt.

Notice what is not in that list: actual knowledge. The test is whether there were reasonable grounds to suspect insolvency. It does not matter whether the director actually knew. A director who buries their head, avoids looking at the financials, or relies on the accountant’s optimism while ignoring the warning signs has no protection under s 588G. The law treats wilful blindness the same as knowledge.

The consequences are serious. A director found liable under s 588G can be ordered to compensate the company (and through it, the creditors) for the amount of debts incurred during the insolvent trading period. In a failed business, that can run to hundreds of thousands of dollars. And unlike a company debt, this liability follows you personally. It cannot be left behind in a liquidation.

The defences under s 588H are narrow but real:

• s 588H(2): The director had reasonable grounds to expect the company was solvent at the relevant time and would remain solvent after incurring the debt.
• s 588H(3): The director relied on information from a person they reasonably believed was reliable and competent to assess solvency.
• s 588H(4): The director did not take part in management at the relevant time due to illness or other good reason.
• s 588H(5): The director took all reasonable steps to prevent the company from incurring the debt.

These defences require evidence. “I thought it would be fine” does not cut it. “My accountant told me we were okay” helps only if the accountant was given accurate information, assessed solvency properly, and gave a genuine opinion rather than just a reassuring phone call.

The director disputes lawyers at Boss Lawyers regularly advise directors who are being pursued for insolvent trading. The consistent theme is that the earlier a director gets advice, the more options they have to defend or limit liability.

The ATO Pincer: Director Penalty Notices in 2026

Insolvent trading is one route to personal liability. The ATO’s Director Penalty Notice regime is another. In 2026, it has become significantly more dangerous.

Under Schedule 1, Part 4-15 of the Tax Administration Act 1953 (Cth), the ATO can issue a DPN making a director personally liable for the company’s unpaid PAYG withholding and superannuation guarantee charge (SGC). The critical distinction is between two types of DPN:

Non Lockdown DPN

If the company’s BAS and SGC statements were lodged within three months of the due date, a DPN is “non lockdown.” The director can end personal liability within 21 days of receiving the DPN by:

• Paying the debt in full;
• Appointing a voluntary administrator; or
• Placing the company into liquidation.

Lockdown DPN

If BAS or SGC statements were lodged more than three months late (or never lodged), the DPN is “locked down.” The director is personally liable for the full amount, period. Appointing a liquidator or administrator after receiving a lockdown DPN does not help. The liability is fixed from the moment the lodgement deadline was missed.

This is why accountants miss it: the trigger is not the payment date. It is the lodgement date. A company that lodged its BAS but did not pay is in a better position than a company that never lodged at all.

Payday Super: 52 DPN Windows Per Year from 1 July 2026

From 1 July 2026, the ATO’s Payday Super regime came into force. Superannuation is now due on each payday, not quarterly as it was before. For a business paying weekly, that is 52 superannuation due dates per year instead of four.

Each missed payday super payment is a separate SGC liability. Each one is a separate DPN window. A director of a business that pays weekly wages and falls behind on super contributions is not looking at one quarterly DPN. They are looking at up to 52 separate exposure events across a year.

The practical consequence: if your company is behind on super, fix it now. Every payday that passes with unpaid super from 1 July 2026 onward adds another layer of DPN exposure that will lock down if the SGC statement is not lodged within three months.

Our detailed guide to the ATO Director Penalty Notice crackdown in 2026 covers this in full. If you have received a DPN or think one is coming, call us immediately. The 21 day window is not negotiable.

Your 6 Options When the Company Is Struggling

There is no single right answer when a company hits financial difficulty. The correct path depends on the size of the debt, whether a genuine turnaround is possible, the attitude of key creditors, and how much time remains before the situation becomes unrecoverable. Here are the six main options:

Option	Process	When it works	Key requirements
1. Trade out (safe harbour)	Informal, no statutory process	Genuine turnaround is possible with time and a plan	s 588GA: all employee entitlements paid when due; all tax lodgements current; documented course of action
2. Informal creditor workout	Negotiation, no statutory process	Small number of creditors, cooperative relationships, viable business	Creditor agreement; does not create moratorium on legal action
3. Small Business Restructuring	Part 5.3B Corporations Act	Total debts under $1 million, viable core business	Tax lodgements current; employee entitlements paid; restructuring practitioner required
4. Voluntary Administration	Part 5.3A Corporations Act (s 436A)	Complex creditor base, time needed, DOCA possible	Administrator appointed; moratorium on most creditor action; creditors vote on outcome
5. Creditors’ Voluntary Liquidation	Part 5.5 Corporations Act	No viable restructure; orderly wind down preferred over court winding up	Liquidator appointed; assets realised for creditors
6. Members’ Voluntary Liquidation	Part 5.4 Corporations Act (s 494)	Company is actually solvent but winding up is the right decision	Directors must make a declaration of solvency under s 494; false declaration is a criminal offence

The most important thing to understand about this table: the options at the top give directors the most control. The further down you go, the less control directors have and the more that outcome is determined by creditors, administrators, and liquidators. Voluntary Administration under s 436A creates a moratorium on creditor action (including the ATO) while an administrator assesses the company’s position. That breathing space can be invaluable, but it only exists if you appoint an administrator before a creditor forces a court winding up..

Our insolvency lawyers in Brisbane can help you work through which option fits your situation. The conversation is confidential and, because it happens with a lawyer, it is legally privileged.

What Directors Must Do RIGHT NOW: A 7 Step Action Plan

If you have read this far, you already know your company has a problem. Here is what you need to do, in order, starting tonight or first thing tomorrow.

Step 1: Get Accurate Financials

You cannot make decisions about a company’s financial position without a current profit and loss statement, balance sheet, and a 90 day cash flow forecast. If your accountant cannot produce these within 48 hours, that is itself a problem. Without accurate financials, you are guessing. And guessing while the s 588G clock is ticking is exactly how directors end up personally liable.

Step 2: Stop Incurring Debts You Cannot Pay

Every invoice you raise, every purchase order you place, every new liability the company incurs while it is insolvent is a potential s 588G debt. This does not mean you stop trading immediately. The safe harbour under s 588GA is specifically designed to allow continued trading while a genuine turnaround is pursued. But it does mean you cannot continue business as usual while pretending the financial problem does not exist. Get advice first, then decide whether and how to continue trading.

Step 3: Pay All Employee Entitlements

This is non negotiable, for two reasons. First, it is the threshold condition for accessing the safe harbour under s 588GA. If employee entitlements are not being paid when due, you cannot rely on that protection. Second, failure to pay employee entitlements triggers lockdown DPN exposure for superannuation guarantee charge under the Payday Super regime. Every week of unpaid super from 1 July 2026 is another lockdown DPN window.

Step 4: Lodge All ATO Returns

Even if you cannot pay the tax debt, lodge the returns. Lodgement within three months of the due date is the difference between a non lockdown DPN (where you still have options) and a lockdown DPN (where you do not). If outstanding BAS or SGC statements have not been lodged, lodge them today. Do not wait for the DPN to arrive and then try to fix it.

Step 5: Take Legal Advice Under Privilege

Communications with your lawyer are protected by legal professional privilege. Communications with your accountant are not privileged, at least not in the same way. If you are worried about personal liability, the advice you get from your lawyer about your options and your exposure is protected from disclosure. The advice you get from your accountant can be subpoenaed in subsequent proceedings. This is not a reason to hide information from your accountant. It is a reason to involve your lawyer early in the process and to have the frank conversations about liability in that context.

Step 6: Document Your Decision Making

The s 588GA safe harbour requires a course of action that is reasonably likely to lead to a better outcome. That course of action needs to be documented contemporaneously. Board minutes, advisor engagement letters, financial projections, restructuring plans, creditor negotiation records. All of these form the evidence base for any future defence of insolvent trading claims. Documents created after the fact are of limited value. Start the paper trail today.

Step 7: Act Before the Statutory Demand Arrives

A statutory demand under s 459E of the Corporations Act triggers a 21 day window to pay, secure, or compound the debt, or apply to court to set it aside. If the demand is not dealt with in 21 days, the company is deemed insolvent under s 459F. Once that deemed insolvency is in place, options narrow sharply. The window for voluntary administration, small business restructuring, or a negotiated outcome with creditors closes. By the time you receive a statutory demand, you are already in reactive mode. The goal is to act before that happens.

What NOT to Do

Just as important as the action plan is knowing what not to do. These five mistakes are made regularly by directors who are trying to help themselves, and end up creating new and serious legal problems in the process.

1. Do Not Pay Related Party Debts First

Paying off a loan to yourself, to a related entity, or to a family member before paying trade creditors is a textbook voidable transaction under s 588FA of the Corporations Act. If the company goes into liquidation, the liquidator can unwind that payment and recover the money. You will have transferred assets out of the company and helped no one, including yourself.

2. Do Not Transfer Assets to Family Members or Related Entities

Transferring company assets to a spouse, a related trust, or another company at less than market value to keep them away from creditors is a creditor defeating disposition under s 588GAA of the Corporations Act. It is a criminal offence introduced in 2020 specifically to deal with this kind of asset stripping. The assets can be recovered and the director can face prosecution.

3. Do Not Pay One Creditor in Full While Others Go Unpaid

If your company goes into liquidation within six months of paying a creditor in full, that payment can be unwound as an unfair preference under s 588FA. The creditor has to repay it to the liquidation pool. You will have burned a relationship and created a claim against the creditor. All for nothing.

4. Do Not Ignore a Statutory Demand

A statutory demand is not a letter of demand. It is a formal legal process under the Corporations Act. Ignoring it results in deemed insolvency under s 459F at the 21 day mark. From that point, a creditor can file a winding up application in court without further notice. If there are grounds to set the demand aside, the application must be made within 21 days. There is no extension.

5. Do Not Resign to Escape DPN Liability

Directors sometimes think that resigning will cut off their exposure to a Director Penalty Notice. It will not, once the relevant debt has crystallised. Resignation after a lockdown DPN has been issued does nothing to reduce the personal liability already in place. And if the company has been trading while insolvent, the insolvent trading liability attached while you were a director. Resignation does not undo that either.

Talk to a Director Dispute and Insolvency Lawyer in Brisbane

If your company is in financial difficulty, the most important decision you can make right now is to get proper legal advice, not just from your accountant, but from a lawyer who acts for directors in exactly this situation.

The insolvency lawyers at Boss Lawyers in Brisbane advise directors on personal liability risk, safe harbour planning, Director Penalty Notices, voluntary administration, and restructuring options. We also act for directors facing claims from liquidators or the ATO. Our director disputes practice handles every stage from the first phone call to final resolution.

The earlier you call, the more options you have. Waiting until a liquidator is appointed or a winding up application is filed is not a strategy. It is a surrender of every option that required time to execute.

Call 1300 267 711 or contact us online. First consultation is a conversation about your situation, no obligation, fully confidential, legally privileged.

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.