Which law covers insolvent trading in Australia?

Section 588G of the Corporations Act 2001 sets out the duties and penalties for insolvent trading.

Who is liable for insolvent trading?

Directors—including de facto and shadow directors—are personally liable if they let the company incur debts while insolvent.

What are the warning signs of insolvency?

Signs include ongoing cash flow shortages, unpaid creditors or taxes, growing debt, and missed employee payments.

What are the penalties for insolvent trading?

Penalties can include fines up to $200,000, director bans, compensation orders, and even criminal prosecution with jail time.

Can directors be prosecuted criminally for insolvent trading?

Yes, especially if dishonest conduct is involved. Conviction can mean imprisonment for 5-10 years.

Can directors be held personally liable for company debts?

Yes. Directors may be required to pay compensation to creditors for debts incurred during insolvent trading.

What is a 'shadow director'?

A shadow director is someone who, though not officially appointed, instructs or influences the board and may be held liable for insolvent trading.

Is ignorance a defence to insolvent trading liability?

No, directors can't defend insolvent trading claims by claiming they were unaware of the company's financial position.

What practical steps can directors take to avoid insolvent trading?

Regular solvency checks, prompt action on cash flow concerns, and seeking professional advice at the first sign of distress.

What should I do if I suspect my company is insolvent?

Stop incurring new debts, seek expert help immediately, and fully assess the company's solvency.

Can you avoid personal liability for insolvent trading?

Yes, by acting quickly and responsibly, and using safe harbour protections if eligible when restructuring.

What role can professional advisers play?

They can help assess solvency, navigate legal risks, and recommend compliant solutions to safeguard directors.

Why is early action critical if insolvency is suspected?

Early intervention maximises options for company survival and reduces potential personal liability for directors.

What is the definition of insolvency for companies?

Insolvency means being unable to pay all debts as and when they fall due, assessed on current and future commitments.

What should a director do if in doubt about solvency?

Immediately get advice from specialists like The Insolvency Group to assess solvency and review responsibilities.

Are compensation orders for insolvent trading limited?

No, compensation for creditor losses can be unlimited and enforced personally on directors.

Does insolvent trading apply to all company types?

Yes, insolvent trading laws apply to all incorporated Australian companies and their directors.

Where can I get professional guidance on insolvent trading risk?

Contact The Insolvency Group for confidential advice to minimise risk, review strategy, and ensure compliance.

What is Insolvent Trading? | A Comprehensive Guide

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What is Insolvent Trading?

Insolvent trading occurs when a company that cannot pay its debts as and when they fall due (i.e., is insolvent) continues to incur further debt. Under Australian law—specifically section 588G of the Corporations Act—company directors have a strict duty to prevent their business from trading while insolvent. If they allow insolvent trading, directors may face personal liability for those debts and substantial legal consequences.

Key Points

Definition: Insolvent trading is when a company continues to incur new debts after it has become unable to pay its existing debts on time.
Director’s Duty: Directors (including de facto and shadow directors) must ensure their company does not trade while insolvent. Ignorance of the situation is not a valid legal defence.
Liability: Directors who breach this duty may be required to pay compensation to creditors, face civil penalties (including disqualification or fines up to $200,000), and even criminal prosecution in cases involving dishonesty.
Determining Insolvency: Signs include ongoing cash flow problems, overdue taxes or superannuation, creditor demands, and inability to pay employees on time.
Penalties: Penalties range from fines and director disqualification to personal compensation orders and, in serious cases, prison terms.

Expert Guidance Matters

Ensuring your business does not trade while insolvent protects you from personal liability and keeps your business compliant. If in doubt, early action and professional guidance are essential.

Contact Andrew and the Insolvency Group for clear, expert advice on insolvent trading and all your insolvency concerns. Protect yourself and your business today.

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Insolvent Trading | At a Glance

Feature	Insolvent Trading Overview
Law	Section 588G, Corporations Act 2001
Who is liable?	Directors and shadow directors
When does it apply?	Incurring new debt while the company is insolvent
Penalties	Personal liability, director bans, fines, criminal charges
How to avoid risk	Regularly assess solvency, act early, seek professional help

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