Insolvent Trading: The Duty, the Risk and the Safe Harbour

Reviewed by Alex Hanley, Chartered Accountant — H&H Tax and Business Advisors
Last reviewed: 13 July 2026

Insolvent trading is a company incurring debts while it is insolvent — that is, while it cannot pay all its debts as and when they become due and payable (section 95A, Corporations Act 2001). Under section 588G of the Corporations Act 2001 (Cth), every director has a positive duty to prevent it. A director who fails in that duty — where there were reasonable grounds to suspect the company was insolvent, or would become insolvent by incurring the debt — can be made personally liable to compensate creditors for their loss, face civil penalties, and, where dishonesty is involved, criminal prosecution (ASIC Regulatory Guide 217).

If you’re reading this at night because the company’s cash has run short and you’re worried about what that means for you personally, take a breath. Insolvent trading claims are ordinarily civil, not criminal. The law provides defences, and — for directors who act early and get proper advice — a statutory safe harbour that may protect you while you work on a genuine turnaround. What the law does not reward is waiting. Every new debt an insolvent company incurs can add to a director’s personal exposure, so the decisions you make in the next few weeks matter more than anything you’ve done so far.

Need to talk it through now? Call 0468 061 936 for a confidential, no-obligation conversation, or send an enquiry and we’ll call you back.

What is insolvent trading?

Insolvent trading is not a crime of “being in debt”. Companies borrow and owe money all the time. The duty in section 588G is narrower and sharper: a director must prevent the company from incurring new debts at a time when it is insolvent, or when incurring the debt would make it insolvent, and there are reasonable grounds for suspecting that insolvency.

A few points directors often miss:

• The duty applies to every director — executive and non-executive alike. It also reaches people who were never formally appointed but act as a director (de facto directors) or whose instructions the board is accustomed to follow (shadow directors) (RG 217.12–217.13). “I wasn’t on the paperwork” is not a shield if you were running the company.
• “Incurring a debt” is broader than ordering stock. Section 588G(1A) deems certain actions to be incurring a debt — including paying a dividend, reducing share capital, buying back shares and entering an uncommercial transaction (s 588G(1A)).
• You can’t outsource the duty. ASIC’s guidance is blunt: directors must actively monitor the company’s solvency, investigate financial difficulty as soon as it appears, obtain professional advice where necessary, and act on it in a timely way — the four key principles of RG 217. A director who relies on others for financial information must have reasonable grounds to trust them and must keep asking questions.

Restructure Partners is an Australian restructuring and insolvency advisory. We help directors work out whether the company is actually insolvent, what their genuine exposure looks like, and which path — turnaround under safe harbour conditions, Small Business Restructuring, voluntary administration or liquidation — deals with it best. Formal appointments are administered by ASIC-registered practitioners we connect you with.

When is a company insolvent? The section 95A test

Under section 95A of the Corporations Act 2001, a person is solvent if, and only if, they are able to pay all their debts as and when they become due and payable — and a person who is not solvent is insolvent. That makes insolvency primarily a cash-flow test, not a balance-sheet one: ASIC’s guidance says determining insolvency “predominantly involves applying a cash-flow test” — realistically assessing whether current and future cash flows will cover liabilities as they fall due (RG 217.22). A company with valuable assets can still be insolvent if it cannot pay this month’s wages, super and suppliers on time.

Two important refinements:

• Temporary illiquidity is not insolvency. The courts distinguish a genuine, short-term cash squeeze that normal trading will resolve from an endemic inability to pay (RG 217.24). The honest question is whether the shortfall is truly temporary — or whether “next month it’ll turn around” has become a habit.
• Bad books can decide the question against you. If the company failed to keep proper financial records, a court in a civil insolvent trading case may presume the company was insolvent for the whole period of the failure, unless the director proves otherwise (s 588E Corporations Act 2001; RG 217.25). Keeping the accounts current is itself a protective act.

Warning signs of insolvency

ASIC’s RG 217 appendix lists the indicators a reasonable person would weigh. The ones we see most often in practice:

• Continuing trading losses and persistent cash-flow difficulty.
• Creditors outside agreed terms — suppliers moving you to cash-on-delivery, or demanding payments on old debts before supplying again.
• Unpaid Commonwealth and state taxes — outstanding PAYG, GST or superannuation guarantee contributions. These also carry a separate personal risk: a director penalty notice can make unpaid PAYG withholding, GST and super personally payable regardless of any insolvent trading claim. If ATO debt is the pressure point, start with our ATO debt guide.
• Legal action over debts — solicitors’ letters, demands, judgments, or a statutory demand under section 459E of the Corporations Act (unanswered for 21 days, it creates a presumption of insolvency).
• Borrowing to survive — finance facilities at their limit, no realistic new funding, special arrangements with selected creditors, or high-interest loans from non-traditional lenders.
• Your accountant, bookkeeper or financial controller has raised concerns — or you can no longer produce timely, accurate figures at all.

One indicator is rarely conclusive. Several together mean it is time for a proper solvency assessment — RG 217 says exactly that: investigate, and consider obtaining appropriate advice (RG 217.121).

What has to be proven in an insolvent trading claim

For a civil claim under section 588G(2), the claimant must establish the elements set out in s 588G(1)–(2):

1. You were a director of the company at the time it incurred the debt. Not when the claim is brought — when the debt arose. This is why resigning doesn’t rewind exposure that has already accrued.
2. The company was insolvent at that time, or became insolvent by incurring that debt (alone or with other debts incurred at that time).
3. At that time there were reasonable grounds for suspecting the company was insolvent or would become insolvent.
4. You failed to prevent the debt being incurred, and either you were actually aware there were grounds for suspicion, or a reasonable person in a like position in a company in the company’s circumstances would have been.

That last element is objective. “I didn’t look at the accounts” is not an answer — it is often the problem.

The criminal offence under s 588G(3) requires more: that you actually suspected the company was insolvent (or would become insolvent by incurring the debt), and that your failure to prevent the debt was dishonest. Honest directors of failed businesses are not the target of the criminal provision — dishonesty is.

The consequences of insolvent trading

Consequences can include compensation orders equal to the debts incurred, civil penalties for an individual of up to the greater of 5,000 penalty units or three times the benefit derived, disqualification — and criminal prosecution where dishonesty is involved (s 588G, s 1317G Corporations Act 2001). Here is what each of those means in practice:

• Compensation — the big one. The company’s liquidator can recover from a director, as a debt due to the company, an amount equal to the loss or damage creditors suffered from debts incurred while the company was insolvent (s 588M Corporations Act 2001). ASIC can also seek compensation orders in civil penalty proceedings (s 588J, s 1317H; RG 217.16), and an individual creditor can sue in limited circumstances. Compensation is uncapped — it scales with the debts incurred — which is why large claims can lead to a director’s personal bankruptcy. Proceedings under s 588M must be begun within 6 years of the beginning of the winding up (s 588M(4)).
• Civil (pecuniary) penalties. Section 588G(2) is a civil penalty provision. Where a court finds the contravention serious, or that it materially prejudiced the company or its creditors, the maximum pecuniary penalty for an individual is the greater of 5,000 penalty units or three times the benefit obtained or detriment avoided (s 1317G; RG 217.16). A penalty unit is currently $330, which puts 5,000 penalty units at $1.65 million. [VERIFY: penalty unit value under s 4AA Crimes Act 1914 current at publication — the amount is indexed periodically.]
• Disqualification. A court may disqualify a director from managing corporations for whatever period it considers appropriate following a civil penalty contravention (s 206C; RG 217.16).
• Criminal prosecution — dishonesty only. Where the s 588G(3) offence is made out, the maximum penalty for an individual is 15 years’ imprisonment, a substantial fine set by the Corporations Act’s penalty formula, or both (Schedule 3, Corporations Act 2001). [VERIFY: current Sch 3 item for s 588G(3) and the s 1311C individual fine formula against C2026C00058 — pre-2019 sources say 5 years / 2,000 penalty units; the 2019 penalties Act appears to raise it to 15 years.]

Two balancing points, because the picture is not all one-way. First, a court can relieve a director from civil liability, wholly or partly, where the director acted honestly and, in all the circumstances, ought fairly to be excused (s 1317S, s 1318; RG 217.19 note). Second, exposure stops growing the moment the company stops incurring debts — which is exactly what happens when a restructuring practitioner, administrator or liquidator is appointed. Acting early is not an admission of guilt; it is how directors contain the damage.

Not sure what your exposure actually looks like? That’s a knowable number, not a fear to live with. Call 0468 061 936 for a confidential, no-obligation conversation, or send an enquiry — we’ll help you map it before you decide anything.

The section 588H defences

Section 588H of the Corporations Act 2001 gives a director four defences to a civil insolvent trading claim. The director bears the onus of proving them:

1. Reasonable grounds to expect solvency (s 588H(2)). At the time the debt was incurred, you had reasonable grounds to expect — and did expect — that the company was solvent and would remain solvent despite the debt. Note the word: expect, which courts treat as a higher state of mind than merely hope or suspect. A vague optimism that things would improve will not make this out.
2. Reliance on a competent and reliable person (s 588H(3)). You had reasonable grounds to believe, and did believe, that a competent and reliable person was responsible for providing you with adequate information about the company’s solvency, that they were fulfilling that responsibility, and on the basis of what they told you, you expected the company was and would remain solvent. ASIC will test whether the person really had that responsibility, whether you checked they were suitably qualified, and whether you asked enough questions (RG 217, Table 2).
3. Illness or other good reason for non-participation (s 588H(4)). Because of illness or some other good reason, you did not take part in the management of the company at the time. This protects a genuinely absent director — it does not protect a director who simply chose not to look.
4. All reasonable steps to prevent the debt (s 588H(5)–(6)). You took all reasonable steps to prevent the company incurring the debt. The matters a court considers include any action you took to appoint a voluntary administrator or a small business restructuring practitioner, when you took it, and what came of it — the statute itself points to formal appointments as the paradigm “reasonable step”.

Two caveats. These defences apply to the civil claim; they do not apply to the criminal offence under s 588G(3) (RG 217.20). And the business judgment rule in s 180(2) does not apply to insolvent trading (RG 217.18 note). In practice, defences are what you argue after the fact. The safe harbour, below, is what you build before it.

The safe harbour: section 588GA

The safe harbour is the most important development in Australian insolvent trading law in a generation — and the least used, because directors don’t know it exists until it’s too late to set up properly.

What the safe harbour protects

Under section 588GA(1) of the Corporations Act 2001, the civil insolvent trading provision (s 588G(2)) does not apply to a debt if:

• starting at the time you began to suspect the company may become or be insolvent, you started developing one or more courses of action reasonably likely to lead to a better outcome for the company; and
• the debt was incurred directly or indirectly in connection with that course of action, or in the ordinary course of the company’s business, during the protected period.

A “better outcome” means an outcome that is better for the company than the immediate appointment of an administrator or liquidator (s 588GA(7)). That is a realistic benchmark, not a fantasy one: the comparison is with what administration or liquidation now would produce.

The protection is not open-ended. It ends at the earliest of (s 588GA(1)(b)):

1. the end of a reasonable period, if you fail to actually take the course of action you developed;
2. when you stop taking the course of action;
3. when the course of action stops being reasonably likely to lead to a better outcome; or
4. the appointment of an administrator or liquidator.

Point 3 is the discipline at the heart of the safe harbour: you must keep re-testing the plan. The moment the turnaround stops being realistically better than an appointment, the protection ends — and continuing to trade past that point puts you back inside s 588G. Safe harbour may protect a genuine, monitored turnaround; it does not protect drift.

What a court weighs

In deciding whether your course of action was reasonably likely to lead to a better outcome, regard may be had to whether you were (s 588GA(2)):

• properly informing yourself of the company’s financial position;
• taking appropriate steps to prevent misconduct by officers or employees that could affect the company’s ability to pay;
• keeping appropriate financial records consistent with the company’s size and nature;
• obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; and
• developing or implementing a restructuring plan to improve the company’s financial position.

ASIC has said it will look for a documented, well-developed plan, evidence the plan was actually implemented and kept under review, and evidence that professional advice was obtained and followed (RG 217, Table 3).

The strict entry conditions: entitlements and lodgements

The safe harbour is not available for a debt if, when the debt is incurred, the company is failing to pay employee entitlements that are payable — which includes superannuation contributions — or failing to give returns, notices and statements as required by taxation laws, where that failure amounts to less than substantial compliance, or is one of two or more such failures in the previous 12 months (s 588GA(4); the note to s 588GA(4) confirms employee entitlements include superannuation, per s 596AA(2)). A court can excuse a failure only in exceptional circumstances or where the interests of justice require it (s 588GA(6)).

Read that carefully, because it is the single most practical fact on this page:

• Staff and super must actually be paid when payable. A company that is behind on superannuation cannot rely on the safe harbour for new debts.
• Tax lodgements must be current — payment is a different question. The condition is about giving returns, notices and statements, not about having paid the tax. A company can owe the ATO money and still qualify. This mirrors the lockdown DPN rule: lodging on time protects directors even when the company cannot pay.

Evidence discipline — the safe harbour is built on paper

Three features of the regime make documentation decisive:

• You carry the evidential burden. A director who wants to rely on the safe harbour must point to evidence suggesting a reasonable possibility it applies (s 588GA(3)). No records, no safe harbour.
• Withheld books can’t save you later. If you fail to hand over the company’s books or information when a liquidator or administrator lawfully requires them, those books — and secondary evidence of them — can become inadmissible to support your safe harbour case (s 588GB).
• The protection can be stripped retrospectively. If, after an appointment, you substantially fail to comply with your obligations to assist the administrator or liquidator (reports, books, information), the safe harbour is taken never to have applied (s 588GA(5)).

In practice, a well-run safe harbour period looks like this: a dated board minute recording the suspicion of insolvency and the decision to develop a plan; a written turnaround plan with milestones; an engagement of an appropriately qualified adviser given complete information; management accounts and cash-flow forecasts updated and reviewed regularly; and minuted decisions each time the plan is re-tested against the “better outcome” benchmark. If the plan fails, that same paper trail supports an orderly move to Small Business Restructuring, voluntary administration or liquidation — and separate safe harbours protect debts incurred in the ordinary course during an SBR restructuring itself (s 588GAAB).

Setting up a safe harbour position properly — the minute, the plan, the adviser, the evidence — is exactly the groundwork we help directors get right before anything formal happens. Call 0468 061 936 — confidential, no obligation — or send an enquiry and we’ll call you back.

What to do now if you’re worried about insolvent trading

1. Stop guessing and get the numbers. Pull together current management accounts, a 13-week cash-flow forecast, an aged creditors list and the company’s tax and super position. The s 95A question is answered with these, not with instinct.
2. Bring lodgements current, even if you can’t pay. Lodging BAS and super statements on time preserves the safe harbour condition and prevents lockdown DPNs — the most protective single step a director can take this week.
3. Pay super and employee entitlements that are payable. Both a safe harbour condition and the debt most likely to become personal via a director penalty notice.
4. Get advice from an appropriately qualified adviser now — and give them complete, accurate information. Early advice is itself one of the statutory safe harbour factors, and it is what ASIC’s four key principles require of you anyway.
5. Decide the path deliberately: turnaround, restructure, or an orderly end. If the business is viable, a documented safe harbour plan or an SBR may save it. If it isn’t, an orderly creditors’ voluntary liquidation stops new debts — and your exposure — from growing.
6. Document everything from today forward. Board minutes, the plan, the advice, the reviews. Whatever path you take, the paper trail is what protects you.

The line you must not cross

One instinct in this situation is dangerous: quietly moving the company’s assets — customers, equipment, stock, the business name — into a new entity so trading can continue while the old company’s creditors are left behind. That is illegal phoenix activity. The Corporations Act now contains a specific duty not to cause the company to make creditor-defeating dispositions, with civil penalties and a criminal offence carrying up to 10 years’ imprisonment (ss 588GAB–588GAC and Schedule 3, Corporations Act 2001); such dispositions can also be unwound. See ASIC’s guidance on illegal phoenix activity. Notably, the safe harbour provisions cover these duties too — the lawful version of “saving the business” runs through a documented plan and market-value transactions, never through concealment. If you haven’t done any of this, nothing in this section applies to you — it is here so you recognise the bad advice when it finds you.

Holding companies: insolvent trading by a subsidiary

Insolvent trading liability can also travel up a corporate group. Under section 588V of the Corporations Act 2001, a holding company can be liable where its subsidiary traded while insolvent, there were reasonable grounds to suspect the insolvency, and the holding company (or its directors) was aware of those grounds — or, given its control over the subsidiary, reasonably should have been. The subsidiary’s liquidator can recover the resulting loss from the holding company (s 588W), and a parallel safe harbour protects a holding company that takes reasonable steps to ensure the subsidiary’s directors have the benefit of the s 588GA safe harbour (s 588WA). If you sit on the board of a parent entity with a struggling subsidiary, the same early-action logic applies at both levels.

Your options compared

There is no universally right column — only the right column for your company’s actual numbers and prospects. That is precisely the assessment worth getting help with.

Get confidential advice today

If several warning signs on this page felt familiar, the worst move is the quiet one: trading on and hoping. The law is structured — through the safe harbour, the s 588H defences and the DPN rules alike — to reward directors who face the position early, take qualified advice and document what they do.

Restructure Partners helps Australian directors do exactly that: assess solvency honestly, understand their personal exposure, weigh a safe harbour turnaround against SBR, voluntary administration and liquidation, and connect with ASIC-registered practitioners where a formal appointment is the right path. We’ll tell you straight if it isn’t.

• Call 0468 061 936 — confidential, no obligation.
• Or use the enquiry form and we’ll come back to you as soon as we can, always confidentially.

FAQ

What is insolvent trading?

Insolvent trading is a company incurring debts while it is insolvent — unable to pay all its debts as and when they become due and payable. Under section 588G of the Corporations Act 2001, every director has a duty to prevent the company incurring debts while insolvent, and a director who fails to do so when there were reasonable grounds to suspect insolvency can be made personally liable for the loss those debts cause creditors.

How do I know if my company is trading while insolvent?

The legal test in section 95A of the Corporations Act 2001 is whether the company can pay all its debts as and when they become due and payable — a cash-flow test, not just a balance-sheet one. ASIC’s Regulatory Guide 217 lists common indicators: continuing trading losses, creditors not being paid on agreed terms, unpaid tax and superannuation, reaching the limit of finance facilities, and legal action over debts. If several of these are present, get a solvency assessment from a qualified adviser now.

Who can bring an insolvent trading claim against a director?

The company’s liquidator is the usual claimant — under section 588M of the Corporations Act 2001 the liquidator can recover, as a debt due to the company, an amount equal to the loss creditors suffered. ASIC can seek civil penalty and compensation orders, and an individual creditor can sue in limited circumstances. Proceedings under section 588M must be started within 6 years of the beginning of the winding up.

Can a director go to jail for insolvent trading?

Only where dishonesty is involved. Insolvent trading is ordinarily a civil matter — compensation orders and civil penalties. It becomes a criminal offence under section 588G(3) of the Corporations Act 2001 where the director suspected the company was insolvent and their failure to prevent the debt being incurred was dishonest. It is a serious offence carrying a lengthy maximum term of imprisonment, and it is the exception: honest directors of failed businesses are not its target.

What are the defences to an insolvent trading claim?

Section 588H of the Corporations Act 2001 provides four defences to a civil claim: the director had reasonable grounds to expect, and did expect, that the company was solvent and would remain solvent; the director reasonably relied on a competent and reliable person responsible for providing adequate information about the company’s solvency; the director did not take part in management at the time because of illness or some other good reason; or the director took all reasonable steps to prevent the company incurring the debt. The director must prove the defence, and these defences do not apply to the criminal offence.

What is the safe harbour for insolvent trading?

The safe harbour in section 588GA of the Corporations Act 2001 protects a director from civil insolvent trading liability for debts incurred while the director is developing or taking a course of action reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator. It is only available while the company is paying employee entitlements (including superannuation) that are payable and keeping its tax lodgements up to date, and the director bears the evidential burden of showing it applies.

Does the safe harbour work if the company owes the ATO money?

It can. The tax condition in section 588GA(4) is about lodgement, not payment — the company must be giving its returns, notices and statements as required by taxation laws. A company can owe the ATO money and still be eligible for the safe harbour. But if lodgements are substantially behind, or employee entitlements including superannuation are not being paid when they are payable, the safe harbour is not available for the debt.

Am I still liable for insolvent trading if I resign as a director?

Resigning does not erase exposure for debts the company incurred while you were a director and it was insolvent — the duty attaches at the time each debt is incurred. Resignation only stops new exposure accruing for debts incurred after you cease to be a director, and it gives up your ability to influence how the situation is resolved. Getting advice and acting on the company’s position is generally more protective than resigning.

Sources: Corporations Act 2001 (Cth) (legislation.gov.au) (including ss 95A, 206C, 459E, 588E, 588G, 588GA, 588GAAB, 588GAB, 588GAC, 588GB, 588H, 588J, 588M, 588V, 588W, 588WA, 1317G, 1317H, 1317S, 1318 and Schedule 3) · ASIC Regulatory Guide 217 — Duty to prevent insolvent trading: Guide for directors (December 2024) · ASIC — Insolvency for directors · ASIC — Illegal phoenix activity · ATO — Director penalty notices

This page is general information only, not legal or financial advice, and Restructure Partners is not affiliated with ASIC or the ATO. Whether your company is insolvent, whether the safe harbour or a defence is available to you, and which pathway suits your circumstances are questions that depend on your specific facts — please seek advice from a qualified professional about your own position before acting. Restructure Partners does not perform formal insolvency appointments; administrators, restructuring practitioners and liquidators are ASIC-registered practitioners.