Insolvent Trading — Director's Personal Liability Risk
If your company incurs debts while unable to pay existing debts as they fall due, you may be personally liable. Understanding Section 588G is the first step to protecting yourself.
What is Insolvent Trading?
Trading while unable to pay debts as they fall due
Insolvent trading occurs when a company incurs a new debt at a time when it is already unable to pay its existing debts as and when they become due and payable. Under Section 588G of the Corporations Act 2001, directors are personally liable for debts incurred while the company is insolvent.
Strict liability provision
Directors have a positive duty to prevent insolvent trading. Ignorance of the company's financial position is not a defence.
Each debt is a separate contravention
Every debt incurred while insolvent is a potential breach of S588G, meaning liability compounds rapidly.
Defences exist — but require action
Safe harbour, reasonable expectation of solvency, and other defences are available, but only if directors act proactively.
Signs Your Company May Be Insolvent
Any of these indicators should prompt immediate professional assessment of your company's solvency position.
Cannot pay debts on time
Consistently late payments to suppliers, landlords, or service providers beyond normal trading terms.
Creditor pressure increasing
Receiving formal demands, statutory demands, or threats of legal action from unpaid creditors.
Overdue ATO obligations
Unpaid BAS, PAYG withholding, superannuation guarantee charge, or income tax — especially if lodgements are also late.
Bounced or dishonoured payments
Cheques, direct debits, or electronic payments failing due to insufficient funds in the company account.
Relying on new debt to pay old debt
Taking out new loans, drawing down credit facilities, or borrowing from related parties solely to meet existing obligations.
If any of these apply, your personal assets may already be at risk
The longer you continue trading while insolvent, the greater your personal liability grows. Every new debt is a separate contravention.
Director Liability for Insolvent Trading
The consequences are severe and personal. Directors face financial penalties and, in serious cases, criminal prosecution.
Personal liability for company debts
Directors can be ordered to personally compensate creditors for every debt incurred while the company was insolvent.
Compensation orders
A liquidator or ASIC can seek court orders requiring directors to pay compensation equal to the loss suffered by creditors.
Civil penalties up to $200,000
ASIC can pursue civil penalty proceedings against directors for contravening Section 588G, with penalties up to $200,000 per contravention.
Criminal penalties for dishonest trading
If a director suspected insolvency and was dishonest about it, criminal prosecution can result in fines up to $220,000 and/or imprisonment for up to 5 years.
Defences Available to Directors
The Corporations Act provides several defences to insolvent trading claims. Each requires evidence and proactive action.
Reasonable grounds to expect solvency
The director had reasonable grounds to expect the company was solvent at the time the debt was incurred, based on available information.
Safe harbour protection (S588GA)
The director was taking a course of action reasonably likely to lead to a better outcome than immediate liquidation.
Reasonable reliance on a competent person
The director reasonably relied on information or advice from a qualified person — such as an accountant or CFO — regarding solvency.
Illness or other good reason
The director did not take part in management due to illness or for some other good reason, and could not reasonably have been expected to participate.
The burden of proof is on the director
If a liquidator or ASIC brings an insolvent trading claim, the director must prove the defence applies. Contemporaneous documentation is essential — records created after the fact carry far less weight.
How SBR Protects Directors from Insolvent Trading
Small Business Restructuring directly addresses insolvent trading risk by creating a formal, documented pathway to resolve the company's debt position.
Appointing an SBR practitioner is one of the strongest steps a director can take to limit personal liability for insolvent trading.
Formal appointment creates documentation
Appointing an SBR practitioner generates a contemporaneous record that the director took concrete steps to address insolvency — strong evidence of a "course of action".
Addresses insolvency directly
SBR is a formal restructuring process designed to resolve the company's debt position, which is the core issue underlying insolvent trading risk.
Works alongside safe harbour
Pursuing SBR is itself evidence that supports a safe harbour defence under S588GA, creating overlapping layers of director protection.
Director retains control
Unlike voluntary administration, directors stay in charge of the business throughout SBR, maintaining operational continuity.
Acting early and engaging a restructuring practitioner is the most effective way to establish both safe harbour protection and limit ongoing insolvent trading exposure.
How Insolvent Trading and Safe Harbour Work Together
Safe harbour under Section 588GA is the primary defence mechanism for directors facing insolvent trading risk.
Safe harbour is a defence to S588G
When a liquidator or ASIC alleges insolvent trading, safe harbour provides a complete defence for debts incurred during the protected period — provided conditions are met.
SBR satisfies the "course of action" test
Pursuing SBR is strong evidence of taking a course of action reasonably likely to lead to a better outcome than immediate winding up — the core safe harbour requirement.
They cover different time periods
Safe harbour protects during the lead-up period while you are taking steps. SBR provides the formal restructuring mechanism. Together they create comprehensive protection.
Documentation is key to both
Both safe harbour and SBR require contemporaneous evidence of decisions, advice, and actions taken. This documentation serves double duty.
When Liability Starts and How It Can Be Mitigated
Liability starts
The moment a director allows the company to incur a debt while the company is insolvent, or becomes insolvent by incurring the debt.
There is no grace period. Every new debt incurred while insolvent is a potential contravention.
Liability accumulates
Each additional debt the company incurs while insolvent represents a separate contravention of Section 588G.
Ongoing trading while insolvent rapidly increases personal exposure with every invoice, purchase order, and commitment.
Liability can be mitigated
By taking immediate action — engaging an advisor, pursuing safe harbour, appointing an SBR practitioner, or entering administration.
The earlier you act, the smaller the window of debts for which you may be personally liable.
What to Do Right Now
If you suspect your company may be insolvent, these five steps should be taken immediately to limit personal exposure.
Stop and assess the position honestly
Review cash flow, upcoming obligations, and whether the company can pay debts as they fall due
Get professional advice immediately
Speak with an insolvency practitioner, restructuring advisor, or accountant with turnaround experience
Document everything from this point forward
Board minutes, cash flow forecasts, professional advice — contemporaneous records are your strongest defence
Ensure employee entitlements and ATO lodgements are current
These are prerequisites for safe harbour protection and SBR eligibility
Evaluate SBR or safe harbour as a formal pathway
A documented restructuring course of action is the most effective way to limit personal liability going forward
Check If SBR Can Protect You from Insolvent Trading Liability
If your company is insolvent or approaching insolvency, SBR may be the fastest way to establish a documented course of action and limit personal exposure.
Check Your Eligibility