21 July 2026Kyra Pastrovic / 3 min read
A director can be personally liable for insolvent trading under the Corporations Act 2001 (Cth) if the company incurs a debt while insolvent and the director knew, or a reasonable person in their position would have known, that the company was insolvent at the time.
Directors of a struggling Australian company often ask this question later than they should, usually once a statutory demand or a winding up notice has already arrived. Vamp Law advises directors on insolvent trading exposure and, just as often, on the practical steps that reduce that exposure before it becomes a live problem rather than after.
The insolvent trading test
Section 588G of the Corporations Act 2001 (Cth) makes a director personally liable if the company incurs a debt while insolvent, and at the time, the director either knew the company was insolvent or a reasonable director in the same position, with the same information reasonably available to them, would have suspected it. The test does not require proof the director acted dishonestly or set out to avoid a debt, only that the debt was incurred without a reasonable basis for believing the company could actually pay it when it fell due.
Consequences for directors
A director found liable for insolvent trading can face a compensation order requiring them to personally repay creditors for losses caused by the debts incurred during the insolvent trading period, civil penalties imposed by a court on application by the regulator, and in more serious cases involving dishonesty, criminal liability. Liquidators actively pursue insolvent trading claims as a recognised way of recovering funds for creditors of a failed company, which is why this exposure is not a theoretical risk for a director of a company that later collapses owing significant debts.
Defences available to directors
Reasonable grounds existed at the time to expect the company was solvent and would remain able to pay its debts as they fell due.
The director relied on information from a competent and reliable person who was responsible for providing accurate financial information to the board, and had no reason to doubt what they were told.
The safe harbour provisions under section 588GA may apply where a director is developing and pursuing a course of action reasonably likely to lead to a better outcome for the company than an immediate move to administration or liquidation, provided specific conditions around record-keeping and appropriate professional advice are met throughout.
The director was seriously ill or otherwise genuinely not taking part in the management of the company at the relevant time the debt was incurred.
How a liquidator investigates insolvent trading
If a company is later wound up, the liquidator will typically review the company's financial records around the period leading up to the collapse to identify debts incurred while the company appears to have been insolvent, and will assess what the directors knew or should have known at each point. This is why contemporaneous board minutes, cash flow forecasts and evidence of professional advice sought at the time carry real weight later, well after the events themselves are only a memory for the people involved.
Warning signs directors should not ignore
Supplier accounts running consistently overdue, well beyond the business's normal trading terms.
Difficulty meeting Australian Taxation Office obligations or staff wages on time, even occasionally.
Reliance on personal funds, personal loans or personal guarantees to cover the company's short-term cash shortfalls on a recurring basis.
Receipt of a statutory demand, a winding up threat, or repeated legal correspondence from more than one creditor at once.
Getting ahead of the exposure
The earlier a director gets advice once these signs appear, the more options are realistically available, including safe harbour, a negotiated restructure with key creditors, or voluntary administration initiated on the director's own terms rather than forced by a creditor's application. Kyra Pastrovic advises Sydney directors and companies on insolvent trading exposure and the practical steps available to manage it. See what happens when a company becomes insolvent for how the broader process works, or make an enquiry to discuss your company's position directly. Read more about insolvency at Vamp Law. This article is general information, not legal advice on your specific circumstances.
Last reviewed 21 July 2026. General information only, not legal advice.
