Insolvent Trading: Complete Guide for Directors — s 588G Liability and Safe Harbour

What Is Insolvent Trading Under s 588G of the Corporations Act?

Section 588G of the Corporations Act 2001 (Cth) is the legislative provision that imposes personal liability on company directors for insolvent trading. It is one of the most significant director liability provisions in Australian corporate law, and one that liquidators invoke regularly when a company collapses with insufficient assets to meet its debts.

Under s 588G, a director contravenes the section if, at the time a company incurs a debt:

1. The company is insolvent; or the debt causes the company to become insolvent
2. The director is aware at that time that there are reasonable grounds to suspect the company is insolvent or would become insolvent
3. A reasonable person in the director’s position in the company’s circumstances would be so aware

It is important to understand that s 588G does not require the director to actually know the company is insolvent. It is enough that a reasonable person in the director’s position would have suspected insolvency. This is an objective standard that catches directors who bury their heads in the sand, not just those who consciously choose to trade on.

The consequences of a breach are serious:

• Civil liability: the director can be ordered by a court to pay compensation to the company equal to the amount of the debts incurred while the company was insolvent
• Criminal liability: where the contravention is dishonest, the director commits a criminal offence punishable by up to 15 years imprisonment or significant financial penalties
• Disqualification: ASIC can apply to have the director disqualified from managing corporations

When Is a Company Insolvent? The Cash Flow Test

Under s 95A of the Corporations Act, a company is solvent if, and only if, it is able to pay all of its debts as and when they become due and payable. A company that is not solvent is insolvent.

This is the cash flow test (also called the commercial solvency test). It is the primary test for insolvency in Australia. The critical question is not whether the company has assets worth more than its liabilities on a balance sheet — it is whether the company can actually pay its bills when they fall due.

A company can be balance-sheet solvent (assets exceed liabilities on paper) but commercially insolvent if it cannot convert those assets into cash fast enough to meet its obligations. Conversely, a company with negative net assets on paper may still be solvent if it has access to credit facilities, committed shareholder support, or cash that allows it to pay debts as they fall due.

Indicators of Insolvency

Australian courts have identified a range of indicators that may point to commercial insolvency, including:

• Inability to pay ordinary trade creditors on normal terms
• Creditors calling up overdue debts and not receiving payment
• Bounced cheques or dishonoured direct debits
• Failure to pay employees’ wages, entitlements, or superannuation on time
• Overdue tax obligations — PAYG, BAS, or SGC
• Reliance on one creditor to float the business while others go unpaid
• Receiving Statutory Demands or letters of demand from creditors
• County or District Court judgments against the company
• Directors providing personal guarantees because the company cannot get credit in its own name
• The company’s accountant or bookkeeper raising concerns about the company’s financial position

None of these indicators is necessarily determinative in isolation — but the more of them that are present, the stronger the inference of insolvency. In litigation, a liquidator pursuing an insolvent trading claim will typically compile a list of these indicators and present them as evidence that the company was insolvent at the relevant time.

Director Personal Liability for Insolvent Trading

If a court finds that a director has contravened s 588G, the liquidator of the company can apply to court for a compensation order against the director personally under s 588M. The compensation payable is equal to the loss or damage suffered by the company’s unsecured creditors as a result of the debts incurred during the period of insolvency.

In practical terms, this means the director can be personally ordered to pay an amount equivalent to all or part of the company’s unsecured creditor shortfall. In large commercial insolvencies, this can run into millions of dollars.

The liability is personal and cannot be avoided by placing the director into bankruptcy — the debt survives bankruptcy proceedings. Directors who are found liable for insolvent trading face a permanent financial consequence unless they can either pay the judgment or reach a compromise with the liquidator.

Liquidators often fund insolvent trading claims through litigation funding agreements, which means that even where the liquidator’s estate has limited resources, the claim against a director can still be pursued vigorously.

ASIC also takes insolvent trading seriously and has taken criminal action against directors in egregious cases. The combination of civil liability to a liquidator and potential ASIC criminal prosecution makes insolvent trading one of the highest-risk areas of Australian corporate law for directors.

The Four Key Defences to Insolvent Trading

Section 588H of the Corporations Act provides directors with four key defences to an insolvent trading claim. The burden of proof falls on the director to establish the defence — it is not for the liquidator to disprove it.

Defence 1: Reasonable Grounds to Expect Solvency

Under s 588H(2), it is a defence if 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 if it incurred that debt.

This defence requires the director to demonstrate an honest and reasonable belief in solvency based on actual information available at the time. The expectation must be well-founded — a director who simply assumes everything is fine without looking at the accounts, reviewing the BAS, or engaging with the company’s financial position cannot establish this defence.

Defence 2: Reliance on Information from a Competent Person

Under s 588H(3), it is a defence if the director relied on information provided by a competent and reliable person in the company (such as a qualified financial controller, CFO, or external accountant) that indicated the company was solvent at the time the debt was incurred.

For the reliance defence to work, the director must have genuinely relied on the information, the person providing it must have been competent and reliable (for example, a qualified CFO, accountant, or financial controller), and the reliance must have been reasonable in the circumstances. A director who receives alarming financial reports but looks away cannot establish this defence.

Defence 3: Non-Participation Due to Illness

Under s 588H(4), it is a defence if the director did not take part in the management of the company at the time because of illness or some other good reason. This defence is narrow and requires the director to demonstrate that the non-participation was genuine and attributable to an identifiable reason. It does not extend to wilful ignorance.

Defence 4: Good Faith — Taking All Reasonable Steps

Under s 588H(5), it is a defence if the director took all reasonable steps to prevent the company from incurring the debt. What constitutes “all reasonable steps” depends on the circumstances, but it typically includes taking prompt action to seek professional advice, engaging with creditors, and considering formal insolvency options.

The Safe Harbour Defence: s 588GA

The most significant development in Australian insolvent trading law in recent decades is the introduction of the safe harbour under s 588GA of the Corporations Act, which came into effect on 19 September 2017.

The safe harbour was designed to encourage directors to attempt to restructure financially distressed companies rather than defaulting immediately to insolvency proceedings. The old regime created a perverse incentive: the moment a director suspected insolvency, the safest legal course was to appoint an administrator immediately, even if a viable restructuring was possible. The safe harbour changes this dynamic.

When Does the Safe Harbour Apply?

The safe harbour applies where:

1. The director starts to suspect on reasonable grounds that the company is or may become insolvent
2. The director then starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator
3. The debts being challenged were incurred directly or indirectly in connection with those courses of action

Where these conditions are met, the safe harbour provides a defence to any insolvent trading claim for debts incurred during the restructuring period.

Eligibility Conditions

Critically, a director cannot access the safe harbour unless:

• The company is meeting its obligations to pay employee entitlements — including wages, leave entitlements, and superannuation — as and when they fall due
• The company is meeting all of its tax filing obligations — including lodging BAS, income tax returns, and other required statements on time

These are threshold requirements. A company that is not paying super on time or not lodging its tax returns cannot access the safe harbour, no matter how well-intentioned the director’s restructuring plan. From 1 July 2026, with Payday Super requiring super to be paid within 7 business days of each pay run, maintaining super compliance as a precondition to safe harbour requires considerably more rigour than under the old quarterly system.

What a Safe Harbour Plan Looks Like

There is no prescribed form for a safe harbour plan. However, the courts and legal practitioners have identified elements that a robust plan should include:

• A clear assessment of the company’s financial position, including the nature and extent of its insolvency or potential insolvency
• Identification of the specific courses of action being pursued (for example: asset sales, capital injection, renegotiation of debt, business restructure, sale of the business as a going concern)
• Engagement of qualified advisers — a restructuring lawyer, accountant, or insolvency practitioner — to assist in developing and implementing the plan
• Documentation of the plan and the director’s decision-making process
• Regular review of the plan to assess whether it remains reasonably likely to produce a better outcome
• Ongoing monitoring of the company’s financial position

Documentation is critical. If the safe harbour is later challenged by a liquidator, the director will need to demonstrate that a genuine, structured restructuring plan was in place — not just a vague hope that things would improve.

When Does the Safe Harbour End?

The safe harbour period ends at the earliest of:

• When the director stops developing or implementing the course of action
• When the course of action is no longer reasonably likely to lead to a better outcome
• When the company enters voluntary administration or liquidation
• When the director fails to comply with the eligibility conditions (super and tax filing)

The safe harbour is not a permanent shield — it is a time-limited protection for a genuine restructuring attempt. If the restructuring fails and the company ultimately goes into liquidation, debts incurred during the safe harbour period that were genuinely connected to the restructuring plan remain protected. Debts incurred for other purposes do not.

Director Penalty Notices and Insolvent Trading: The Connection

Insolvent trading and Director Penalty Notices (DPNs) are legally distinct regimes, but they frequently arise together in the same insolvency event. Understanding how they interact is essential for directors facing financial distress.

When a company is trading while insolvent, it is often simultaneously accumulating unpaid PAYG withholding, superannuation, and GST obligations — the very obligations that trigger DPN liability. This means a director in a financially distressed company can simultaneously face:

• An insolvent trading claim by the liquidator under s 588G for the full amount of debts incurred during the insolvency period
• A DPN from the ATO making the director personally liable for accumulated PAYG, SGC, and GST

These liabilities can overlap and compound. The same period of trading can give rise to both heads of claim. A director who receives a DPN and then allows the company to continue trading while insolvent is accumulating personal exposure on two parallel tracks.

The safe harbour requires the company to remain current on super and tax obligations — which means that accessing the safe harbour for insolvent trading also helps avoid DPN lockdown for super and tax. Conversely, a company that falls behind on super and tax loses access to the safe harbour and faces accelerating DPN exposure. The two regimes are interconnected.

If you are dealing with ATO DPN pressure and you are also uncertain about the company’s solvency, you are in a situation where both regimes are live. Getting legal advice that addresses both simultaneously is critical.

→ Director Penalty Notices — what every Queensland director needs to know

What to Do If You Think Your Company Is Insolvent Right Now

If you are reading this because you are genuinely concerned about your company’s financial position, here is a practical framework for the next 72 hours.

Step 1: Get a Realistic Picture of the Numbers

Do not manage by gut feel. Pull together your company’s current financial position: aged creditor list, ATO running balance, bank accounts, aged debtor list, and any loan facilities. You need to know what the company owes, to whom, how overdue those obligations are, and what cash is actually available or receivable in the next 30, 60, and 90 days.

Step 2: Identify the Specific Concerns

Are there unpaid ATO obligations? Are creditors threatening legal action? Has the company received a Statutory Demand? Is there a DPN already issued or imminent? The specific nature of the risk shapes the response.

Step 3: Get Legal Advice Immediately

This step cannot be delayed. The options available to a director deteriorate rapidly as time passes. Early advice opens up options — including the safe harbour — that close off as the situation deteriorates. Even a single consultation can give you a framework for managing the next few weeks.

Step 4: Engage Your Accountant and Consider a Restructuring Adviser

An experienced restructuring adviser — whether a lawyer, accountant, or registered insolvency practitioner — can help you assess whether the business is genuinely viable and, if so, what a credible restructuring plan looks like. If the business is not viable, they can help you implement a controlled wind-down that minimises personal liability.

Step 5: Do Not Take Informal Action to Disadvantage Creditors

In a distressed situation, the temptation is sometimes to pay preferred creditors, move assets, or take other steps to “protect” certain relationships. These steps can constitute preferential payments, uncommercial transactions, or other voidable transactions that a liquidator can unwind — and they can also expose directors to additional personal liability or criminal allegations. Take legal advice before taking any steps of this kind.

How Boss Lawyers Acts for Directors Facing Insolvent Trading Claims

Being pursued by a liquidator for insolvent trading is a serious matter. The amounts can be substantial, the process is adversarial, and the consequences — including the risk of bankruptcy and personal financial destruction — are real.

At Boss Lawyers, we act for directors defending insolvent trading claims. Our approach:

• Case assessment: We analyse the liquidator’s claim in detail — the period of alleged insolvency, the debts said to have been incurred, and the evidence supporting the claim. Many insolvent trading claims are not as strong as the initial demand letter suggests.
• Defence identification: We assess which defences are available — the s 588H defences, the safe harbour, challenges to the solvency finding — and build the strongest available case.
• Negotiation: Many insolvent trading claims settle short of trial. We negotiate from a position of strength, grounded in a realistic assessment of the claim’s merits.
• Litigation: Where a claim proceeds to trial, we act in the Federal Court or Supreme Court on behalf of the director, marshalling expert accounting evidence, financial records, and director testimony.
• Proactive protection: Where a company is currently in distress and an insolvent trading claim is a future risk, we structure safe harbour arrangements and document the director’s decision-making to maximise the prospect of a successful defence if a claim is later brought.

How Boss Lawyers Acts for Liquidators Pursuing Insolvent Trading Claims

We also act on the other side: for liquidators, creditors, and insolvency practitioners pursuing insolvent trading and other director liability claims.

Insolvent trading recovery actions require careful analysis of the company’s financial records to establish the date of insolvency, the debts incurred during that period, and the connection between the director’s conduct and the loss to creditors. We work with expert forensic accountants and insolvency practitioners to build claims that can be enforced effectively — whether through negotiated settlement or court proceedings.

→ Learn more about Boss Lawyers’ insolvency legal services

→ Insolvent trading and director liability — Brisbane lawyers

Frequently Asked Questions

What is insolvent trading?

Insolvent trading occurs when a company incurs a debt while it is insolvent — that is, unable to pay its debts as and when they fall due — and the director is aware (or a reasonable person in their position would be aware) of reasonable grounds to suspect insolvency. Under s 588G of the Corporations Act 2001 (Cth), directors can be made personally liable for those debts.

How is insolvency determined? Is it about assets and liabilities?

Australian law uses the cash flow (commercial solvency) test: a company is insolvent when it cannot pay its debts as and when they fall due, regardless of the balance sheet position. A company can be balance-sheet solvent but commercially insolvent if it lacks the liquidity to meet its obligations. Courts look at whether debts are being paid on time in the ordinary course of business.

What is the safe harbour for insolvent trading?

The safe harbour under s 588GA of the Corporations Act protects directors from insolvent trading liability for debts incurred during a genuine restructuring attempt. To access it, the director must start developing a course of action reasonably likely to lead to a better outcome than immediate insolvency, and the company must remain current on employee entitlements (including super) and tax lodgement obligations. The safe harbour requires documented restructuring steps and ongoing professional advice.

Can a liquidator sue me personally for insolvent trading?

Yes. If a company goes into liquidation and the liquidator forms the view that a director allowed the company to trade while insolvent, the liquidator can bring proceedings against the director personally under s 588M of the Corporations Act. The director can be ordered to pay compensation equal to the loss suffered by creditors as a result of the debts incurred during the period of insolvency. This can amount to millions of dollars in significant insolvencies.

What is the connection between insolvent trading and Director Penalty Notices?

Insolvent trading and DPNs are separate legal regimes but commonly arise together. A company trading while insolvent is often simultaneously accumulating unpaid PAYG withholding, super, and GST — the obligations that trigger DPN personal liability for directors. A director in financial distress can face both an insolvent trading claim from the liquidator and DPN demands from the ATO for the same period. The safe harbour for insolvent trading requires super and tax compliance — which also helps avoid DPN lockdown exposure.