Insolvent Trading: What Every Australian Director Must Know

Insolvent trading is the exposure that catches good directors off guard. The principle is blunt: a director has a duty to prevent the company incurring debts when it is insolvent — that is, when it cannot pay its debts as and when they fall due. Breach it, and you can be made personally liable.

The duty in plain terms

If you are a director and your company is insolvent (or would become insolvent by taking on a debt), and there were reasonable grounds to suspect that, continuing to rack up debts can expose you personally. The protection of the corporate structure does not extend to this.

Warning signs you cannot ignore

• Ongoing trading losses and deteriorating cash flow
• Creditors on stop-credit, or paid only after final demands
• Overdue tax, superannuation and BAS obligations
• Inability to obtain finance, or refinancing only to survive week to week
• Cheques or payments dishonoured

The “safe harbour” idea

The law recognises that the right response to trouble is not always to down tools immediately. Where a director starts developing a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation — and takes proper advice — there may be protection from insolvent-trading liability for debts connected to that course. The detail is technical and time-sensitive; the point is that acting early and getting advice is what creates options.

Protecting yourself

The directors who fare best are the ones who can show they engaged with the problem: they sought advice, kept records, and acted reasonably under genuine pressure. The ones who fare worst put their heads down and hoped. Documentation and context are everything when conduct is later examined.

We work alongside your lawyer and accountant to build exactly that record — the evidence that you behaved responsibly as the business came under strain. See Director Advocacy or start a confidential conversation while you still have room to move.

Regulated Pty Ltd provides strategic, non-legal advocacy and narrative services. This article is general information, not legal, tax or financial advice, and does not create a client relationship. Rules differ between states, territories and authorities and change over time. For advice about your situation, consult an admitted legal practitioner or the relevant regulator. We work alongside your existing professional team.