A company owes your business money, but it has no assets available to pay the debt. The director may continue to operate other businesses, hold assets through related companies or appear to maintain a comfortable lifestyle. None of that, by itself, makes the director liable for the company's debts.
The starting point is to establish whether the debt can be recovered from the company, whether another party is legally liable, and whether assets have been transferred or transactions entered into that may give rise to a recovery claim.
In some cases, the appropriate course is to pursue the debt. In others, the better option is to investigate the company's affairs and consider insolvency proceedings.
“The decision should be informed by the available evidence and the likely cost of recovery.”
01 Establish the company's financial position
Before commencing proceedings or spending further money on enforcement, a creditor should investigate the debtor company's financial position.
The following searches can assist:
- ASIC company searches: confirm the company's registered details, officeholders and registration status. Historical extracts may identify changes in directorship and other relevant corporate information;
- PPSR searches: identify registered security interests over personal property. A company may own equipment, vehicles or other assets that are subject to security interests, limiting the amount available to unsecured creditors;
- Land title searches: establish whether the company owns real property; and
- Court and insolvency searches: may identify existing proceedings, external administration or other signs of financial distress.
Searches should be considered alongside the company's accounts, payment history, contractual documents and any information about related entities.
A company may have no assets registered in its own name but still have recoverable claims against third parties. Conversely, the existence of assets does not necessarily mean there is sufficient equity to satisfy the debt after secured creditors and other claims are considered.
The purpose of the investigation is to assess the prospects of recovery before incurring legal costs which can be substantial.
02 Can the director be pursued personally?
A company is a separate legal entity from its directors and shareholders. A creditor cannot ordinarily recover a company debt from a director merely because the director controls the company or has failed to arrange payment.
“There must be a legal basis for personal liability.”
Personal guarantees
A personal guarantee may allow a creditor to pursue a director or another individual who guaranteed the company's obligations. The terms of the guarantee, the obligations covered and any conditions affecting enforcement must be examined.
Creditors should review the original credit application, contract and terms of trade to determine whether a guarantee was given and whether it is enforceable.
Insolvent trading
Section 588G of the Corporations Act 2001 (Cth) imposes a duty on directors to prevent a company from incurring debts in circumstances where the statutory requirements for insolvent trading are satisfied.
Broadly, the relevant questions include whether the person was a director when the debt was incurred, whether the company was insolvent or became insolvent by incurring the debt, whether there were reasonable grounds to suspect insolvency, and whether the director knew of those grounds or a reasonable person in the director's position would have been aware of them.
A company failing to pay an invoice does not, without more, establish insolvent trading. The company's financial position when it incurred the debt is central to the inquiry.
Novo Pty Ltd (in liquidation) [2025] NSWSC 1033
In the matter of Novo Pty Ltd (in liquidation) [2025] NSWSC 1033, the Supreme Court of New South Wales considered a liquidator's claim against a director for insolvent trading. The Court found that the requirements for contravention of the insolvent trading provisions had been established in respect of the relevant debts. The decision illustrates the importance of establishing insolvency and the grounds for suspecting insolvency at the time debts were incurred.
A creditor should also understand that an insolvent trading claim is not simply an ordinary debt claim against a director. Under sections 588M and 588R–588U of the Corporations Act, a creditor may be able to pursue compensation for loss arising from insolvent trading, but the statutory conditions and procedural requirements must be satisfied. These include requirements concerning the company's winding up and the liquidator's consent or the applicable notice procedure.
Breaches of directors' duties and transactions involving related parties
Directors may also incur liability for breaches of their duties under the Corporations Act or general law.
Depending on the circumstances, claims may be available where company assets have been improperly diverted, company property has been transferred for inadequate consideration, or directors have caused the company to enter into transactions in breach of their duties.
Other parties may also be liable where the requirements for knowing involvement, receipt of company property or another recognised cause of action are established.
Fastline Logistics Pty Ltd (in liq) v Lay [2025] FCA 346
In the matter of Fastline Logistics Pty Ltd (in liq) v Lay [2025] FCA 346, the Federal Court examined allegations involving related-party transactions, transfers of a business and suspected illegal phoenix activity. Although certain unfair preference claims succeeded, other claims were dismissed. The decision demonstrates that unusual transactions and relationships between companies do not, on their own, establish liability. The relevant legal elements must be proved.
03 When liquidation may assist
Where a company cannot pay its debts, liquidation may provide a means of investigating its affairs and pursuing claims for the benefit of creditors.
A creditor may seek to wind up an insolvent company. One common procedure involves serving a statutory demand for a qualifying debt under section 459E of the Corporations Act. The debt must be due and payable and meet the statutory minimum, currently $4,000. The demand must comply with the applicable requirements.
A company generally has 21 days after service to comply with the demand or apply to set it aside. Failure to comply may provide a basis for a presumption of insolvency, which can support a winding-up application. The demand does not itself wind up the company, and the creditor must still take the appropriate steps to obtain a winding-up order.
Statutory demands require care. A genuine dispute about the debt, an offsetting claim or another recognised ground may affect whether a demand can be set aside. A creditor should not use the procedure as a substitute for determining a genuinely disputed claim.
Once a liquidator is appointed, the company's affairs can be investigated and potential recovery claims assessed. Depending on the circumstances, these may include:
Unfair preferences
Section 588FA addresses transactions under which a creditor receives more than it would have received in the winding up, subject to the statutory requirements. Certain payments made before liquidation may be recoverable, but not every payment to a creditor is an unfair preference.
Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2
In Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, the High Court considered the treatment of payments made during a continuing business relationship. It rejected the peak-indebtedness rule, which had allowed liquidators to select a point within the relevant period to maximise an unfair preference claim. The case is important where a creditor continued supplying a company while receiving payments against a running account.
Uncommercial transactions and creditor-defeating dispositions
Certain transactions may be challenged under the statutory regime for voidable transactions, including qualifying uncommercial transactions and creditor-defeating dispositions. The applicable provisions have different requirements and time periods.
Where a business or its assets have been transferred to a related company, the transaction should be examined to determine what was transferred, what consideration was paid, whether the company was insolvent and whether the relevant statutory provisions apply.
The term phoenix activity is often used to describe arrangements in which a business continues through another entity while liabilities remain with the original company. Not every restructuring or transfer of a business is unlawful. Liability depends on the transaction and the applicable legal provisions.
Loans and other amounts owed to the company
A director or related entity may owe money to the company under a loan, an outstanding account or another arrangement. A liquidator can investigate the liability and pursue repayment where appropriate.
The company's records, bank statements, loan agreements and related-party transactions may be important in establishing whether an amount is genuinely owed and recoverable.
Funding an investigation
A liquidator's investigation and recovery proceedings involve costs. If the company has insufficient funds, a liquidator may consider creditor funding or other available sources of funding.
ASIC's Assetless Administration Fund provides funding for eligible investigations and reports concerning companies with few or no assets where enforcement action may result. It can also support certain recovery actions where fraudulent or illegal activity is suspected.
Funding is subject to the applicable eligibility criteria and is not guaranteed. Liquidation does not guarantee payment. Recoveries are subject to the costs of the process, the rights of secured creditors and the statutory priority of claims. Nevertheless, where there is evidence of recoverable assets or potential claims, liquidation may offer a route to recovery that is not available through ordinary enforcement alone.
04 What creditors should do next
A creditor dealing with a company that appears to have no assets should consider the following steps.
Delay can affect the availability of evidence, the value of assets and the ability to pursue particular claims. Applicable limitation periods and insolvency-related deadlines should be considered at an early stage.
05 How GopherWood Lawyers can assist
GopherWood Lawyers advises businesses on commercial debt recovery, insolvency disputes and claims involving directors and related entities.
Our work includes reviewing contractual rights and guarantees, assessing enforcement options, pursuing statutory demands and winding-up proceedings, and advising on potential recovery claims arising from insolvent trading and transactions involving company assets.
“Where a company owes your business money but appears unable to pay, the first step is to determine what can realistically be recovered, from whom and by what means.”
Contact GopherWood Lawyers to discuss a commercial debt recovery matter.