Insolvent Trading: A Director's Guide to Section 588G

Key Takeaways

• A director contravenes s 588G if the company incurs a debt while insolvent and there are reasonable grounds for suspecting insolvency. You do not need to know the company is insolvent. A reasonable person in your position needs only to suspect it.
• Insolvent trading is not limited to trade debts. Section 588G(1A) treats paying dividends, buying back shares, reducing share capital, providing financial assistance and entering into uncommercial transactions as debts for the purposes of the provision.
• The civil penalty for an individual is up to $1,650,000 or three times the benefit derived. For a body corporate, it is up to $16,500,000, three times the benefit or 10% of annual turnover. In serious cases involving dishonesty, criminal prosecution can result in jail time.
• Four statutory defences are available under s 588H, including reasonable expectation of solvency and reliance on a competent and reliable person. Safe harbour under s 588GA has strict preconditions, including that the company must be paying employee entitlements and substantially complying with tax reporting obligations.
• If the company's books are not in order, s 588E creates a presumption that the company was insolvent for the entire period the records were deficient. The director then bears the burden of proving solvency.

1. 1.What Is Insolvent Trading?
2. 2.The Section 588G(1A) Trap: Capital Transactions Count
3. 3.When Does the Duty Arise?
4. 4.Who Is Caught?
5. 5.The Penalties
6. 6.The Defences
7. 7.Safe Harbour
8. 8.Presumption of Insolvency
9. 9.Who Brings the Claim?
10. 10.What To Do Now

If you are a director of an Australian company, you have a personal duty to prevent the company from incurring debts while it is insolvent. If the company trades while insolvent and you fail to prevent it, you can be personally liable for every debt the company incurs during that period.

The penalties are severe: up to $1,650,000 for individuals, unlimited compensation orders and jail time in serious cases. Liquidators pursue these claims years after the company has been wound up and creditors can pursue them directly.

This is not a theoretical risk. In Trinco (NSW) Pty Ltd (in liq) [2025] NSWSC 993, a de facto director who was never formally appointed was ordered to pay $10,059,175.52 for insolvent trading. He controlled the company in practice. That was enough.

This guide explains the law, the penalties and the defences available to directors, with a focus on practical steps you can take now to reduce your exposure.

Concerned about your company's solvency? Contact Astris Law on (07) 3519 5616 for confidential advice on your obligations and options.

What Is Insolvent Trading?

Section 588G of the Corporations Act 2001 (Cth) imposes a duty on directors to prevent a company from incurring debts while it is insolvent.

A company is insolvent if it is unable to pay all of its debts as and when they become due and payable: section 95A. This is a cash flow test, not a balance sheet test. A company can have assets exceeding its liabilities and still be insolvent if it cannot meet its debts when they fall due. Conversely, a company with a net asset deficiency may be solvent if it has access to sufficient cash or credit to meet its obligations as they arise.

Under section 588G(1), a director contravenes the provision if four conditions are met:

1. The person is a director of the company at the time the debt is incurred.
2. The company is insolvent at that time, or becomes insolvent by incurring that debt (or debts including that debt).
3. At that time, there are reasonable grounds for suspecting that the company is or would become insolvent.
4. That time is at or after the commencement of the provision.

The critical element is the third one: reasonable grounds for suspecting insolvency. This is an objective test. It does not matter whether the director actually suspected insolvency. Under section 588G(2), a director contravenes the provision if either the director was aware of the grounds for suspecting insolvency, or a reasonable person in a like position in a company in the company's circumstances would have been so aware. The standard is one of suspicion, not knowledge or belief. The threshold is low.

The Section 588G(1A) Trap: Capital Transactions Count

Many directors assume that insolvent trading is only about running up trade debts with suppliers, failing to pay employees or accumulating unpaid invoices. It is not.

Section 588G(1A) specifies categories of transactions that are treated as the incurring of a debt for the purposes of the insolvent trading provisions. Each is deemed to create a debt at a specific point in time:

• Paying a dividend is treated as incurring a debt when the dividend is paid or, if the company's constitution provides for the declaration of dividends, when the dividend is declared. If your company is insolvent or becomes insolvent by paying the dividend, you have an insolvent trading exposure.
• Reducing share capital under Division 1 of Part 2J.1 (other than a cancellation for no consideration) is treated as incurring a debt when the reduction takes effect.
• Buying back shares is treated as incurring a debt when the buy-back agreement is entered into, even if the consideration is not a sum certain in money.
• Redeeming redeemable preference shares at the company's option is treated as incurring a debt when the company exercises the option. If the shares are redeemable otherwise than at the company's option, the debt is incurred when the shares are issued.
• Providing financial assistance to a person to acquire shares in the company or a holding company is treated as incurring a debt when the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided.
• Entering into an uncommercial transaction within the meaning of section 588FB (other than one ordered by a court or directed by a prescribed agency) is treated as incurring a debt when the transaction is entered into.

The practical implication is significant. A director who approves a dividend, a share buyback or a capital reduction while the company is in financial difficulty is not merely making a poor commercial decision. They are incurring a debt for the purposes of section 588G and exposing themselves to personal liability for insolvent trading.

This is a trap because these transactions often occur at times when the company is under financial pressure. A director might approve a dividend to satisfy a shareholder, or a share buyback to consolidate control, without appreciating that the transaction itself creates an insolvent trading exposure.

When Does the Duty Arise?

The duty arises when there are "reasonable grounds for suspecting" that the company is insolvent or would become insolvent. This is a deliberately low threshold. It is not a test of knowledge. It is not even a test of belief. It is a test of suspicion on reasonable grounds.

ASIC v Plymin [2003] VSC 123 (the Water Wheel case) identified 14 indicators of insolvency that have become the standard reference point for assessing whether reasonable grounds for suspicion existed. ASIC Regulatory Guide 217 (updated December 2024) also provides guidance on the indicators that should alert a director to potential insolvency.

The 14 Water Wheel indicators are:

1. Continuing losses.
2. Liquidity ratios below 1.
3. Overdue Commonwealth and State taxes.
4. Poor relationship with the present bank, including inability to borrow further funds.
5. No access to alternative finance.
6. Inability to raise further equity capital.
7. Suppliers placing the company on cash on delivery terms, or otherwise demanding special payments before resuming supply.
8. Creditors unpaid outside normal trading terms.
9. Issuing of post-dated cheques.
10. Dishonoured cheques.
11. Special arrangements with selected creditors.
12. Solicitors' letters, summonses, judgments or warrants issued against the company.
13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
14. Inability to produce timely and accurate financial information to display the company's trading performance and financial position and make reliable forecasts.

These are non-exhaustive. No single indicator is determinative and the presence of several does not automatically mean the company is insolvent. But multiple indicators appearing together create precisely the kind of reasonable grounds for suspicion that trigger the director's duty under section 588G.

The practical point is that directors cannot afford to be passive. If any of these indicators are present, the director needs to be actively investigating the company's solvency position, not waiting for someone else to raise the alarm.

Who Is Caught?

Section 588G applies to directors. But the definition of "director" in section 9 of the Corporations Act is broad. It includes formally appointed directors, de facto directors (persons acting in the position of a director regardless of the name given to their position) and shadow directors (persons in accordance with whose instructions or wishes the directors of a company are accustomed to act).

Trinco (NSW) Pty Ltd (in liq) [2025] NSWSC 993 illustrates the reach of the de facto director concept. Anthony Azizi was never formally appointed as a director of the company. His sister was the registered director and shareholder. But he exercised real managerial control over the construction company, which was found to have been insolvent from 1 July 2018 until it was wound up on 9 December 2021. He was found liable as a de facto director and ordered to pay $10,059,175.52.

The message is clear: if you are running the business, you are a director for the purposes of section 588G, regardless of what your title says or whether your name appears on any ASIC register.

The Penalties

The penalties for insolvent trading are substantial and operate on multiple levels.

Civil Penalties

Section 588G(2) is a civil penalty provision. The maximum pecuniary penalty under section 1317G for an individual is the greater of 5,000 penalty units ($1,650,000 at the current rate of $330 per penalty unit, effective from 7 November 2024) or, if the court can determine the benefit derived and detriment avoided, three times that amount.

For a body corporate, the maximum is the greatest of 50,000 penalty units ($16,500,000), three times the benefit derived and detriment avoided, or 10% of annual turnover for the 12-month period ending at the end of the month in which the contravention occurred (capped at 2.5 million penalty units, which is $825,000,000).

In determining the penalty, section 1317G(6) requires the court to take into account the nature and extent of the contravention, the nature and extent of any loss or damage suffered, the circumstances in which the contravention took place and whether the person has previously been found to have engaged in similar conduct.

On top of the pecuniary penalty, the court may order compensation under section 588J. Compensation orders are not subject to the penalty caps. They are based on actual loss suffered by creditors and can be unlimited.

The court may also disqualify a director from managing corporations under section 206C.

Criminal Penalties

Section 588G(3) creates a criminal offence where the director suspected the company was insolvent and the failure to prevent the debt was dishonest. The criminal provision carries the prospect of imprisonment.

The point is not academic. The Cap Coast Telecoms Pty Ltd matter went well beyond insolvent trading. In the days before liquidation, sole director Richard Ludwig placed a $2 million iPhone order with a supplier, then worked with two pre-insolvency advisors to illegally strip more than $740,000 of company assets out through fictitious invoices to put them beyond the reach of creditors. Following an ASIC investigation and prosecution by the Commonwealth DPP, Ludwig pleaded guilty in the Brisbane District Court to 11 charges including dealing with the proceeds of crime and breaching his directors' duties. The Court imposed a five year prison sentence with a non-parole period of 20 months. The two pre-insolvency advisors who designed the scheme were also prosecuted and received prison sentences of five and four-and-a-half years. The case was the subject of the ABC 7.30 segment below.

ABC 7.30, "Dodgy pre-insolvency advisors". Credit: ABC News.

The difference between the civil and criminal provisions is not the dollar amount. It is the mental element. The civil provision applies where the director was aware of the grounds for suspicion or a reasonable person would have been. The criminal provision requires actual suspicion of insolvency and dishonesty in failing to prevent the debt.

Compensation orders are also available on conviction under section 588K.

The Defences

Section 588H provides four statutory defences. The burden is on the director to establish them.

Reasonable expectation of solvency (section 588H(2))

The director must prove they had reasonable grounds to expect, and did expect, that the company was solvent and would remain solvent even if it incurred the debt. This is an objective and subjective test. The director must actually have held the expectation (subjective) and that expectation must have been reasonable (objective). A director who simply hoped things would improve without any rational basis for that hope will not satisfy this defence.

Reliance on a competent and reliable person (section 588H(3))

The director must prove they had reasonable grounds to believe, and did believe, that a competent and reliable person was responsible for providing adequate information about whether the company was solvent and that the person was fulfilling that responsibility. This is the defence that connects to the principle in ASIC v Healey [2011] FCA 717 (the Centro case), where the Federal Court held that directors have an irreducible, non-delegable core duty to read and understand financial statements. You can rely on others to gather and present information, but you cannot delegate your obligation to actually understand the company's financial position.

Illness or other good reason (section 588H(4))

The director must prove they did not take part in the management of the company at the relevant time because of illness or for some other good reason. This is narrow. It does not protect a director who was simply disengaged or inattentive. It is intended for cases where the director was genuinely unable to participate in management, such as serious illness or incapacity.

Reasonable steps (section 588H(5))

The director must prove they took all reasonable steps to prevent the company from incurring the debt. What constitutes reasonable steps will depend on the circumstances, but it might include seeking professional advice, opposing the transaction at board level, seeking the appointment of an administrator or resigning (though resignation alone is unlikely to be sufficient if the director took no other steps).

Safe Harbour

Section 588GA provides a safe harbour that protects directors from civil liability under section 588G(2) in certain circumstances. It does not protect against criminal liability under section 588G(3).

The safe harbour applies where, after the director starts to suspect the company may become or be insolvent, the director starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.

The debt must be incurred directly or indirectly in connection with any such course of action, or in the ordinary course of the company's business, during the period from when the director begins developing the course of action until the earliest of: the end of a reasonable period if the director fails to take the course of action, when the director ceases to take the course of action, when the course of action ceases to be reasonably likely to lead to a better outcome, or the appointment of an administrator or liquidator.

What counts as "reasonably likely"?

Section 588GA(2) sets out factors the court may consider in determining whether a course of action was reasonably likely to lead to a better outcome:

• Whether the director is properly informing themselves of the company's financial position.
• Whether the director is taking appropriate steps to prevent misconduct by officers and employees.
• Whether the director is taking appropriate steps to ensure the company is keeping appropriate financial records.
• Whether the company or the director is obtaining advice from an appropriately qualified entity.
• Whether the director is developing or implementing a restructuring plan.

The preconditions that catch directors out

Section 588GA(4) imposes mandatory preconditions. The safe harbour does not apply if, at the time the debt is incurred, the company is failing to pay the entitlements of its employees that are payable (including superannuation contributions, per section 596AA(2)), or failing to lodge returns, notices, statements, applications or other documents as required by taxation laws within the meaning of the Income Tax Assessment Act 1997.

This tax compliance requirement is in the statute itself, not merely ASIC guidance. A company that is behind on its BAS lodgements, income tax returns or other tax reporting obligations cannot rely on safe harbour, regardless of how good its restructuring plan is. The same applies to outstanding employee entitlements.

A failure in either category will disqualify the company from safe harbour if the failure amounts to less than substantial compliance, or is one of two or more failures during the 12-month period ending when the debt is incurred.

Retrospective loss of safe harbour

Section 588GA(5) provides that the safe harbour is taken never to have applied at all if the director later fails to comply with reporting obligations to administrators or liquidators (under sections 429(2)(b), 438B(2), 475(1), 497(4) or 530A(1)) and that failure amounts to less than substantial compliance. In other words, if you rely on safe harbour and then fail to cooperate with the administrator or liquidator, you lose the protection retrospectively.

The evidential burden

The director bears the evidential burden of establishing the safe harbour: section 588GA(3). The protection is not automatic. The director must be able to demonstrate, with evidence, that they took the steps the provision requires.

A detailed treatment of the safe harbour regime, including its interaction with voluntary administration and deeds of company arrangement, is beyond the scope of this guide and will be addressed in a companion article.

Presumption of Insolvency

Section 588E(4) creates a presumption that the company was insolvent throughout any period during which it failed to keep financial records as required by section 286(1), or failed to retain them for seven years as required by section 286(2). The presumption is rebuttable, but the burden shifts to the director to prove the company was solvent. It does not apply if the failure to keep records is only minor or technical.

The practical consequence is serious. If a company's books are not in order when a liquidator is appointed, the liquidator does not need to prove insolvency for the period the books were deficient. The director must prove solvency, which is extremely difficult without the very records that were not kept. Directors who allow a company's financial records to fall into disrepair are effectively handing the liquidator the presumption of insolvency on a platter.

Who Brings the Claim?

Insolvent trading claims can come from multiple directions.

ASIC can bring civil penalty proceedings under section 588G(2). Because insolvent trading is a civil penalty provision under section 1317E, ASIC has standing to pursue directors directly. ASIC v Plymin [2003] VSC 123 is an example of ASIC-initiated enforcement. Criminal proceedings under section 588G(3) are also prosecuted following ASIC investigation.

Liquidators can recover compensation as a debt due to the company under section 588M(2). This is the recovery mechanism that puts money back into the pool for creditors.

Creditors can bring claims directly against a director under section 588M(3), but only if the company is in liquidation and the creditor has the liquidator's written consent or has given notice to the liquidator and obtained leave of the court. There are waiting periods before a creditor can bring a claim without the liquidator's consent: section 588S imposes a six-month period and section 588T an additional three-month period.

The limitation period for claims under section 588M is six years from the date of winding up: section 588M(4).

Directors sometimes assume that if the company has no money left, nobody will bother pursuing an insolvent trading claim. Hall v Poolman [2007] NSWSC 1330 (the Reynolds Wine Group litigation) shows why that assumption is wrong. The company had secured creditors owed approximately $30 million and unsecured creditors owed approximately $99 million. The liquidators pursued the directors under section 588M regardless. The Court of Appeal recognised the public interest in pursuing insolvent trading claims and confirmed that litigation funding arrangements for such claims are permissible. The relevant factor is the anticipated total recovery from the directors personally, not merely the likely dividend to creditors from the company's remaining assets.

This is the practical reality: litigation funders will back insolvent trading claims where the director has personal assets worth pursuing. The absence of money in the company is not a shield.

What To Do Now

If you are a director and you are concerned about your company's financial position, the single most important thing you can do is act early. The longer you wait, the more debts the company incurs, the larger your potential exposure grows and the harder it becomes to access the defences and safe harbour protections the law provides.

Practical steps every director should be taking:

• Know your numbers. Make sure you are receiving and reading regular financial reports. Understand the company's cash flow position, its aged payables, its aged receivables and its balance sheet. If you are not receiving this information, demand it. If the company's financial records are not up to date, getting them in order is an immediate priority. Section 588E means that incomplete books create a presumption of insolvency.
• Watch for the warning signs. The 14 Water Wheel indicators are a practical checklist. If any of them are present, you need to be actively investigating and documenting what you find.
• Keep your tax and employee obligations current. If the company is behind on BAS lodgements, PAYG, superannuation or income tax returns, it cannot access safe harbour. Getting these current is a precondition to any restructuring effort being protected.
• Get advice early. If you suspect the company may be approaching insolvency, get legal and financial advice before the position deteriorates further. Advice from an appropriately qualified professional is one of the factors the court considers in determining whether a safe harbour course of action was reasonably likely to lead to a better outcome.
• Document everything. If you are developing a restructuring plan, relying on professional advice or taking steps to monitor the company's solvency, keep a written record. The safe harbour places an evidential burden on the director. Without contemporaneous records, you may struggle to prove what you did and when.
• Do not assume insolvent trading is just about trade debts. If you are considering paying a dividend, approving a share buyback, reducing capital or entering into a transaction that may not be on commercial terms, consider the section 588G(1A) implications. These transactions are debts for the purposes of the insolvent trading provisions.
• Consider your position carefully. If the company is insolvent and there is no realistic prospect of a better outcome, continuing to trade exposes you to personal liability for every new debt. The appointment of a voluntary administrator may be the appropriate step. That is a decision that requires professional advice, but it is not one to delay.

Insolvent trading liability is personal. It survives the winding up of the company, it can be pursued for six years and it can result in your disqualification from managing any corporation. The time to act is before the company's position becomes irretrievable.

If you would like confidential advice on your obligations as a director or your exposure to insolvent trading liability, please get in touch.

This article is for general information purposes only and does not constitute legal advice. You should seek professional advice tailored to your specific circumstances before acting on any information in this article. Liability limited by a scheme approved under Professional Standards Legislation.