In this practice area
Claims against directors for debts incurred while a company was insolvent, and the statutory defences and safe harbour protection available to directors.
What insolvent trading is
Directors have a duty to prevent their company incurring debts when it is insolvent, or when incurring the debt would make it insolvent, if there are reasonable grounds to suspect that insolvency. When a company that traded while insolvent goes into liquidation, the liquidator can seek compensation from the directors personally for the loss suffered by the unpaid creditors.
We act for directors facing insolvent trading claims and for creditors and liquidators assessing whether a claim is worth bringing.
The legal framework
The duty is in section 588G of the Corporations Act 2001 (Cth). A liquidator can recover compensation under section 588M equal to the loss suffered by creditors whose debts were incurred while the company was insolvent. The claim must generally be brought within six years after the winding up begins. A creditor can bring its own claim in limited circumstances, including with the liquidator's consent. Section 588G is also a civil penalty provision, and dishonest insolvent trading is a criminal offence.
Section 588H provides defences, including that the director had reasonable grounds to expect, and did expect, that the company was solvent; that the director reasonably relied on information from a competent and reliable person; that the director did not take part in management for illness or another good reason; or that the director took all reasonable steps to prevent the debt being incurred. The safe harbour in section 588GA protects a director from the duty for debts incurred in connection with a course of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation, provided conditions such as paying employee entitlements and keeping tax reporting up to date are met.
How these claims typically run
The central issue is usually the date of insolvency. Liquidators rely on financial records, cash flow, overdue creditors, ATO debts, dishonoured payments and the opinions of forensic accountants. Directors often respond with evidence of available funding, realistic forecasts or restructuring steps. Liquidators frequently examine directors under the Corporations Act before issuing proceedings, and many claims are funded by litigation funders or resolved against the director's assets or insurance.
How GopherWood Lawyers acts
For directors, we act from the first sign of pressure: advice on the duty, safe harbour and restructuring options while the company is still trading, then representation at examinations and in any proceedings. We test the claimed insolvency date against the records and expert evidence, and consider any directors and officers insurance. For creditors and liquidators, we assess the evidence of insolvency and the director's capacity to pay before costs are committed.