Small Business Restructuring › Insolvent Trading
Insolvent Trading Lawyers — Defend the Claim. Protect the Director.
Directors who allow a company to incur debts when it is insolvent face personal liability under s588G of the Corporations Act 2001 for those debts — payable to the liquidator for the benefit of all creditors. Insolvent trading liability can arise years after the company entered insolvency and can exceed the director's personal assets. A lawyer advises on defences, manages the claim, and protects the director's personal position throughout.
⚠ Insolvent trading liability accrues from the date of insolvency — not from the date of the liquidator's appointment. A liquidator can investigate the company's trading history going back years and bring claims against directors for debts incurred while the company was insolvent. Get advice on your personal exposure now.
Insolvent Trading Matters We Handle
Defending liquidator claims — and preventing liability before it arises.
Insolvent Trading Claim Defence
Where a liquidator brings an insolvent trading claim against a director, a lawyer assesses the merits of the claim — identifying the date of insolvency alleged, the debts alleged to have been incurred while insolvent, and the defences available. A lawyer also assesses whether the liquidator's claim is properly constituted and whether the limitation period has expired.
Safe Harbour Defence
The safe harbour defence (s588GA) is the most powerful defence to an insolvent trading claim — it provides a complete defence where the director was taking a course of action reasonably likely to lead to a better outcome than immediate administration. A lawyer identifies whether the safe harbour conditions were met and gathers the contemporaneous documentation required to establish the defence.
Business Judgement Rule Defence
A director has a defence to an insolvent trading claim if they had reasonable grounds to expect that the company was solvent — and the grounds were reasonable even if they turn out to have been wrong. A lawyer identifies the evidence that supports the director's honest and reasonable belief in the company's solvency at the time the debts were incurred.
Reliance on Information Defence
A director has a defence where they reasonably relied on information provided by a competent and reliable person — typically an accountant or CFO — which led them to believe the company was solvent. A lawyer gathers the evidence of what information the director received, from whom, and the grounds on which that person was competent and reliable.
Illness or Absence Defence
A director has a defence where, due to illness or some other good reason, they did not take part in managing the company at the relevant time. A lawyer assesses whether this defence is available in the specific circumstances — noting that courts apply this defence narrowly — and gathers the evidence needed to support the claim.
Relief from Liability — s1317S
Even where an insolvent trading claim is established, the Court has power under s1317S to relieve a director from liability (wholly or partly) where the director acted honestly and, having regard to all the circumstances, it would be fair to excuse the director. A lawyer makes submissions on relief from liability where the full amount of the claim would be disproportionate to the director's culpability.
The Legal Framework
Insolvent trading — s588G Corporations Act 2001.
The s588G duty — when does it apply?
Under s588G of the Corporations Act 2001, a director contravenes the section if: (1) the company incurs a debt; (2) at the time the debt is incurred, there are reasonable grounds to suspect that the company is insolvent or would become insolvent by incurring the debt; and (3) the director is aware (or a reasonable person in their position would be aware) of those grounds; and (4) the director fails to prevent the company from incurring the debt. Liability applies to each debt incurred — so a company that traded while insolvent for 2 years may have incurred thousands of debts for which the director is potentially liable.
Solvency — the cash flow test
A company is insolvent when it is unable to pay all its debts as and when they become due and payable (s95A Corporations Act 2001). The test is a cash flow test — not a balance sheet test. A company may be balance-sheet solvent (assets exceed liabilities) but cash flow insolvent (unable to pay debts on time). The ATO is often the first creditor to become overdue — unpaid PAYG, GST, and superannuation are frequently the first indicators of insolvency in a small business. A lawyer assesses the date on which the company became insolvent by reference to the financial records and the pattern of creditor payments.
Civil vs criminal liability — ss588G(2) and (3)
Section 588G creates both civil liability (s588G(2) — failure to prevent insolvent trading) and criminal liability (s588G(3) — dishonest failure to prevent insolvent trading). Civil liability exposes the director to compensation orders payable to the liquidator — equivalent to the amount of the unsatisfied debts incurred while insolvent. Criminal liability (where the director knew the company was insolvent and acted dishonestly) exposes the director to fines and imprisonment (up to 5 years). In practice, most insolvent trading claims are civil — liquidators pursue civil recovery from directors to maximise the return to creditors.
Quantum of the claim — the extent of personal liability
The amount the director is liable to pay under an insolvent trading claim is the total amount of debts incurred by the company while insolvent — for which creditors have proved in the liquidation. In practice, the liquidator identifies the date of insolvency and calculates the aggregate of all debts incurred after that date — which can be very large if the company traded while insolvent for a prolonged period. The liquidator is not required to prove that each creditor suffered loss — all debts incurred while insolvent are potentially recoverable. A lawyer assesses the quantum of the claim and negotiates a settlement where appropriate.
Limitation period — 6 years from debt incurred
Insolvent trading claims are subject to a 6-year limitation period from the date each debt was incurred (s588M(3) Corporations Act 2001). This means a liquidator can bring a claim in respect of debts incurred up to 6 years before the claim is made — which, in a long insolvency investigation, can result in claims reaching back many years before the company actually entered formal insolvency. A lawyer assesses whether any part of the liquidator's claim is time-barred and raises limitation as a defence where applicable.
Compensation order and enforcement
Where an insolvent trading claim succeeds, the Court makes a compensation order against the director — requiring the director to pay the liquidator (for the benefit of creditors) the amount of the unsatisfied debts. The compensation order is a personal liability of the director — it can be enforced against the director's personal assets, including the family home (if the director has an ownership interest), superannuation (in some circumstances), and other assets. A lawyer advises on the enforcement of compensation orders and the strategies available to protect the director's personal assets during the litigation.
How It Works
One request. Free insolvent trading advice.
Tell us whether a liquidator has made a claim, the period of alleged insolvent trading, the quantum of the claim, and whether you have legal representation. A director liability lawyer will contact you urgently.
Submit Your RequestDescribe the claim
Tell us whether a liquidator has made a claim, the alleged date of insolvency, the quantum of the claim, and any defences you believe are available. If the company is still trading and you are concerned about exposure, tell us the company's financial position.
Matched to a director liability lawyer
Your request is matched to a lawyer experienced in insolvent trading claims — who can assess the merits of the claim, identify available defences, and advise on the strategy for resolving the claim with the lowest possible personal exposure.
Free consultation
A lawyer contacts you for a free consultation — assessing the strength of the claim, the defences available, and the strategy for protecting your personal assets throughout the litigation or negotiation.