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Directors who trade while insolvent face personal liability. Boss Lawyers provides experienced defence and strategic advice on insolvent trading claims under the Corporations Act.
Insolvent trading is one of the most serious risks facing company directors in Australia. Under section 588G of the Corporations Act 2001 (Cth), directors who allow a company to incur debts when it is insolvent — or when there are reasonable grounds to suspect insolvency — can be held personally liable for those debts.
At Boss Lawyers, we regularly act for directors defending insolvent trading claims brought by liquidators. We also advise directors of companies in financial difficulty on how to manage their obligations and reduce personal exposure, including through the safe harbour provisions.
If you are a director facing an insolvent trading claim, or if your company is in financial difficulty and you need to understand your position, contact us immediately. Early advice is critical.
Insolvent trading occurs when a company incurs a debt at a time when the company is insolvent, or becomes insolvent by incurring that debt, and there are reasonable grounds for suspecting that the company is or would become insolvent.
The duty to prevent insolvent trading is set out in section 588G of the Corporations Act. It applies to every person who is a director of the company at the time the debt is incurred. This includes de facto directors and shadow directors — not just those formally appointed.
A company is insolvent if it is unable to pay all of its debts as and when they become due and payable (section 95A). This is a cash flow test — the question is whether the company can meet its obligations from its available resources, including cash, receivables, and credit facilities.
If a liquidator establishes insolvent trading, the director may be ordered to pay compensation to the company equal to the amount of the debt incurred. This is a personal liability — it cannot be paid by the company or covered by insurance (directors’ and officers’ insurance typically excludes insolvent trading claims).
The compensation is calculated as the amount of the debt or debts incurred during the period of insolvency. In practice, this can amount to millions of dollars where a company has continued to trade for an extended period while insolvent.
In addition to civil liability, directors who engage in dishonest insolvent trading face criminal penalties under section 588G(3), including imprisonment for up to 5 years and fines of up to $220,000.
ASIC can also seek civil penalty orders under section 1317E, including pecuniary penalties and disqualification from managing corporations.
The Corporations Act provides several defences to an insolvent trading claim under section 588H:
The director had reasonable grounds to expect that the company was solvent and would remain solvent. This requires more than mere hope or belief — the director must show that they had a reasonable basis for their expectation, such as financial statements, cash flow projections, or commitments from investors or lenders.
The director took all reasonable steps to prevent the company from incurring the debt. What constitutes reasonable steps depends on the circumstances, but may include seeking financial advice, obtaining accurate financial information, and causing the company to cease trading.
The director did not take part in the management of the company during the relevant period because of illness or for some other good reason. This is a narrow defence and is difficult to establish.
The director relied on information provided by a competent and reliable person that led the director to believe the company was solvent. This may include reliance on financial statements prepared by an accountant or advice from a financial adviser.
The safe harbour provisions introduced in 2017 provide a further defence where the director, after becoming aware of the company’s financial difficulties, develops a course of action that is reasonably likely to lead to a better outcome for the company than administration or liquidation.
One of the most critical and contested issues in insolvent trading proceedings is determining the date on which the company became insolvent. This is because the director’s liability only extends to debts incurred after the date of insolvency.
The courts apply the cash flow test under section 95A — whether the company was able to pay all its debts as and when they became due and payable. The courts also consider what are known as the “usual indicia of insolvency” including:
Liquidators typically engage forensic accountants to prepare solvency reports. Directors should obtain their own expert evidence on the date of insolvency, as the liquidator’s assessment is often aggressive.
ASIC has published a list of common warning signs that a company may be insolvent. Directors should be alert to these indicators:
If your company is exhibiting any of these warning signs, you should seek legal and financial advice immediately. The existence of warning signs does not necessarily mean the company is insolvent, but it does mean you need to actively assess the company’s financial position.
Insolvent trading claims are typically brought by the company’s liquidator after the company has been placed into liquidation. The liquidator’s approach usually involves:
Directors who receive a letter of demand from a liquidator should seek legal advice immediately. There are often valid defences that can significantly reduce or eliminate liability, but these must be properly identified and presented.
If your company is in financial difficulty, or you are facing an insolvent trading claim, here is what you need to know:
For more information about our insolvency services, contact Boss Lawyers on 1300 267 711.
Insolvent trading claims are among the most consequential proceedings a director can face. A successful claim results in personal liability — often for substantial amounts — that cannot be insured against.
At Boss Lawyers, we understand the stakes. We have acted for directors in insolvent trading claims across a range of industries and claim sizes. Our approach is rigorous — we examine every aspect of the liquidator’s case, challenge the date of insolvency, identify available defences, and develop a strategy designed to achieve the best possible outcome for you.
We also work proactively with directors of companies in financial difficulty to manage their obligations, implement safe harbour protections, and make informed decisions about the company’s future.
Insolvent trading claims require detailed legal analysis, commercial understanding, and strong advocacy. At Boss Lawyers, we combine over 22 years of experience with a practical, results-focused approach.
We do not accept the liquidator’s case at face value. We challenge the evidence, identify the defences, and fight for the best outcome. If you are facing an insolvent trading claim, you need a lawyer who will fight for you — not just go through the motions.
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Insolvent trading claims under section 588G are subject to a limitation period of 6 years from the date the cause of action accrued (typically the date the debt was incurred). However, the limitation period may be extended in certain circumstances. Liquidators also have the power to seek Court extensions.
Yes. Section 588G applies to all directors of the company at the time the debt was incurred, including non-executive directors. However, the defences available — including the defence of taking reasonable steps — may be assessed differently for non-executive directors depending on their role and involvement in the company’s management.
Generally, no. Most D&O insurance policies exclude claims for insolvent trading, as section 588G(2) involves a contravention of the Corporations Act. However, policy terms vary and you should review your specific policy. D&O insurance may cover legal defence costs associated with defending an insolvent trading claim.
The safe harbour defence under section 588GA provides protection for directors who, after becoming aware of financial difficulties, take steps to develop a course of action that is reasonably likely to lead to a better outcome for the company than administration or liquidation. The director must also meet certain preconditions, including keeping proper books and paying employee entitlements.
Yes. All directors of the company at the time a debt is incurred may be liable for that debt under section 588G. The liability is joint and several, meaning the liquidator can pursue one or more directors for the full amount. Directors may have contribution rights against each other.
Do not ignore it and do not admit liability. Seek independent legal advice immediately. There may be valid defences that can reduce or eliminate your liability. You generally have time to respond, but early engagement is important to protect your position and develop a defence strategy.
If you need experienced legal guidance regarding insolvent trading claims and director defence, contact Boss Lawyers today. Call us on 1300 267 711 or complete the enquiry form above.
Boss Lawyers Pty Ltd — Level 27, Santos Place, 32 Turbot Street, Brisbane QLD 4000.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
