What Is Insolvent Trading?

Insolvent trading occurs when a company continues to incur debts despite being unable to pay its existing financial obligations. In Australia, directors have a legal duty to prevent this, and failing to do so can result in serious personal, civil, or even criminal consequences. Understanding the rules around insolvent trading is essential to protect your business—and yourself.

Quick Summary

• Insolvent trading is when a company trades while unable to pay its debts.

• Company directors have a legal duty under Section 588G of the Corporations Act 2001 to prevent this.

• Penalties include personal liability, civil fines, and criminal charges.

• Safe harbour protections may apply if directors take reasonable steps to improve the business’s position.

• Accurate financial oversight and timely advice are essential to compliance.

Recognise the Risk: What Is Insolvency?

A company is considered insolvent when it cannot pay its debts as and when they fall due. This includes regular outgoings like rent, wages, superannuation, and supplier invoices. Warning signs can include:

• Inability to meet BAS or tax obligations

• Constantly extending payment terms with creditors

• Defaulting on loan repayments

• Overdue super or payroll liabilities

Regularly reviewing your financial statements and tax returns is critical to understanding your solvency. Falling behind on accounts payable and receivable may also be an early indicator of financial stress.

If your business is showing signs of difficulty, it’s vital to act quickly. Continuing to operate without assessing your financial position may put you in breach of director duties.

Understand Your Legal Obligations as a Director

Section 588G of the Corporations Act 2001 makes it unlawful for directors to allow their company to trade while insolvent. To comply, directors must:

• Stay informed about the company’s financial position

• Regularly review cash flow and financial forecasts

• Seek external advice when concerns arise

This duty applies not only to formally appointed directors but also to shadow directors—individuals who influence company decisions without being officially listed. Our corporate secretarial services can help you stay compliant and up to date with governance obligations.

What Happens If You Trade While Insolvent?

Directors who fail to prevent insolvent trading can face the following consequences:

Civil penalties

• Disqualification from managing companies

• Personal liability for debts incurred during the period of insolvency

• Compensation orders sought by liquidators

Criminal charges

If dishonesty or recklessness is involved, the Australian Securities and Investments Commission (ASIC) may pursue criminal prosecution. Penalties can include:

• Fines of up to 2,000 penalty units (over $500,000)

• Imprisonment of up to five years

Reputational damage

Legal action for insolvent trading can severely damage personal and business credibility, impacting future opportunities.

What Is Safe Harbour—and Can It Protect You?

To encourage early intervention, the safe harbour provisions (Section 588GA) offer directors protection from insolvent trading liability, provided they:

• Begin developing a course of action that is reasonably likely to lead to a better outcome than administration or liquidation

• Ensure employee entitlements and tax planning obligations are met during this period

• Maintain proper financial records and documentation

When used correctly, safe harbour gives directors the breathing space to stabilise and restructure the business without immediate personal risk.

How Origin Business Consultants Can Help

We’re here to help directors manage risk, meet compliance obligations, and make informed decisions with confidence.

With decades of combined experience and a strong understanding of Australian legislation, we:

• Assess your company’s solvency position

• Provide restructuring and turnaround support as part of our business advisory services

• Help implement safe harbour strategies where appropriate

• Guide you through cash flow forecasting, reporting, and scenario planning

Our goal is to take the weight off your shoulders—so you can focus on rebuilding value.

Outcome: Protect Your Business and Avoid Personal Exposure

By understanding the definition, consequences, and legal framework of insolvent trading, you protect not only your company but also your personal assets and professional standing.

Don’t wait until it’s too late—early advice is your best defence.