What is Insolvent Trading?

Insolvent trading is the law under the Corporations Act section 588G that says that if a company is insolvent and a director allows the company to incur a new debt, then the director can be personally liable for the new debts incurred. The law makes directors responsible for ensuring that their company does not trade while insolvent. This is in addition to their general duties to act with care and diligence, in good faith, in the best interests of the company and not to improperly use their position or information received for personal gain.

This page is contains general information about Insolvent Trading in Australia. To read about our solutions for companies that are trading while insolvent (or might be), please visit this page instead.

Can you tell me about insolvent trading in simple, non-legal, terms?

A quick explanation of Insolvent trading laws is:

  • The stick – the Law asks “Is the company insolvent?” If yes, then the directors must act immediately or they may be personally liable for debts that the company incurs after the date of insolvency.
  • The carrot – the Law provides a range of options to directors who suspect insolvency and they are designed to save a company.

What are the elements to be proven for a director to be personally liable under insolvent trading laws?

The following things need to apply for a director to be personally liable for insolvent trading:

  • The company is in liquidation;
  • The company was insolvent when a debt was incurred;
  • The debts are unpaid;
  • The person was a director, or a “shadow director”, at the time debts were incurred;
  • There were reasonable grounds for the director to suspect the company was insolvent.

What is the definition of “insolvent”?

Solvency and insolvency are defined in the Corporations Act at Section 95A in this way: A person (a person is defined to include a company) is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. And, a person who is not solvent is insolvent.

Is my Company insolvent?

Determining if a company is insolvent is a very complicated area of the law. We provide a very useful online tool at our “Is my company insolvent?” page which can be helpful in doing an initial analysis.

Is a director automatically liable for all debts of a company?

No. The insolvent trading laws make a director personally liable only for new debts incurred after the date the company became insolvent.

What is the definition of a “director”?

“Director” is defined as those formally appointed as a director, as per lodgements at ASIC, but it can also include a “shadow director” being someone who is acting in the position of a director, even if not formally appointed. Insolvent trading laws do not apply to management.

What are my options if my company is insolvent?

If your company is insolvent, the first thing to ensure is that your company does not incur any new debts. A director should then seek professional advice on their options. There are a wide variety of options which include voluntary administration, recapitalisation, liquidation and restructuring. Have a look at The Restructuring Spectrum to get a snapshot of the types of solutions available to companies that are insolvent.

If my company did trade while insolvent, what penalties can apply?

The penalties that apply for insolvent trading can include:

  • Disqualification from managing a company
  • Fines of up to $200,000
  • An order to pay compensation to the company equivalent to the loss suffered by creditors
  • Criminal proceedings

What debts can a director be liable for under insolvent trading laws?

A director can be personally liable for any debt incurred after the date the company became insolvent. So, to be clear, a director cannot be personally liable for a debt that was incurred whilst the company was solvent, even if it remains unpaid as a result of subsequent insolvency.

What are the criminal penalties for insolvent trading?

Insolvent trading is an offence and can be referred to ASIC for further investigation and possible criminal prosecution. In serious cases it can include a prison term.

Can a Holding or parent company be liable for insolvent trading debts?

Yes, a holding company can also be liable for the debts of a subsidiary if it allows the subsidiary to trade while insolvent.

What are the defences to an insolvent trading claim?

There are defences available to a director accused of insolvent trading. Those defences are that:

  • There were reasonable grounds to expect solvency;
  • It was reasonable to rely on information from a competent and reliable manager;
  • The director was not involved in management because of illness or for some other good reason;
  • All reasonable steps were taken to prevent the company incurring the debt.

Can a creditor take an insolvent trading action?

Yes, if a liquidator does not pursue an insolvent trading claim, the creditors of the company can take an insolvent trading action themselves. Creditors can only take action against directors for their own debts whereas a liquidator can pursue an insolvent trading claim on behalf of all creditors.

What’s the difference between civil and criminal insolvent trading?

Insolvent trading leaves a director open to civil and possibly criminal penalties. The difference is that civil proceedings are effectively chasing money from the director, whereas a criminal action is seeking a criminal conviction which can mean a prison term or some other penalty.

How long after liquidation can a liquidator commence an insolvent trading action?

A liquidator has six years from the beginning of the liquidation to commence an action for insolvent trading.

What do you do if a liquidator has sent you a letter saying you are liable for insolvent trading debts?

If you have received a letter from a liquidator saying you are personally liable under insolvent trading laws then it is a serious matter and you should immediately seek professional advice.


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Liquidation Law can be a complex area and circumstances vary, so we recommend a telephone call for your initial consultation. We will then gladly meet you or just confirm our advice and quote in writing.

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