What is insolvent trading under s 588G?

A company is solvent only if it can pay all its debts as and when they become due and payable (s 95A). The test is cash flow, not the balance sheet.

A director contravenes s 588G(2) if, when the company incurs a debt:

  • the person is a director, including a de facto or shadow director (s 9AC);
  • the company is insolvent, or becomes insolvent by incurring the debt;
  • there are reasonable grounds to suspect insolvency; and
  • the director is aware of those grounds, or a reasonable person in a like position would be.

A debt is incurred when the company exposes itself to a future payment obligation. In Hawkins v Bank of China (1992) 26 NSWLR 562, a guarantee was enough.

Suspicion is less than belief: apprehension short of a concluded view. In Star Recruitment Service Pty Ltd v Smith [2025] QSC 334, the Supreme Court of Queensland found a sole director had such grounds. Judgment exceeded $1.1 million plus interest.

How do courts decide whether a company was insolvent?

The indicators in ASIC v Plymin [2003] VSC 123 are the usual starting point:

  • continuing losses and overdue tax
  • creditors unpaid outside terms, and suppliers demanding cash on delivery
  • dishonoured cheques, and no access to further finance
  • demands, summonses or judgments, and an inability to produce timely financial information.

Insolvency proved at any point in the 12 months before the relation-back day is presumed to continue (s 588E(3)). If the company failed to keep the financial records s 286 requires, it is presumed insolvent throughout that period (s 588E(4)).

Who can bring an insolvent trading claim, and for what?

Liquidators. The main claim is compensation under s 588M for unsecured creditors’ loss from the insolvency. Proceedings must begin within six years of the winding up (s 588M(4)). Holding companies face similar claims for subsidiaries (ss 588V–588X).

Creditors. A creditor can sue for its own loss with the liquidator’s written consent, or with the court’s leave (ss 588R–588T). It cannot sue where the liquidator has already acted over that debt (s 588U).

ASIC. Section 588G(2) is a civil penalty provision. The maximum penalty is the greater of 5,000 penalty units, currently $1.82 million, and three times any benefit (s 1317G). ASIC can also seek compensation (s 588J) and disqualification (s 206C). Dishonest insolvent trading is an offence (s 588G(3)): up to five years’ imprisonment, 2,000 penalty units, or both.

A judgment is a personal debt, costs follow, and bankruptcy can result. Director penalty notices for unpaid PAYG withholding, GST and superannuation are a separate regime. D&O insurance may respond, but some policies exclude insolvency claims, so check the wording and notify early.

What are the defences to insolvent trading?

Section 588H gives a director a defence if they prove that, when the debt was incurred, they:

  • had reasonable grounds to expect, and did expect, that the company was and would remain solvent;
  • reasonably relied on a competent and reliable person for adequate information about solvency;
  • did not take part in management because of illness or another good reason; or
  • took all reasonable steps to prevent the debt, including steps towards appointing an administrator.

“Expect” means more than hope. In Hall v Poolman [2007] NSWSC 1330, directors relying on a disputed tax refund lost the defence once a reasonable expectation ended. Courts may also relieve directors who acted honestly and ought fairly to be excused (s 1317S).

Safe harbour under s 588GA protects debts incurred while pursuing a credible plan. The plan must be reasonably likely to produce a better outcome than administration or liquidation. Temporary COVID-19 relief (s 588GAAA) ended on 31 December 2020.

What should you do if a liquidator sends a letter of demand?

  1. Do not ignore it. Liquidators often sue once the deadline passes.
  2. Gather financial records, board papers, bank statements, ATO correspondence and advice received.
  3. Check you were a director when each debt was incurred, and that it was unsecured.
  4. Test the insolvency case, including any presumptions relied on.
  5. Consider the s 588H defences and safe harbour, and your evidence.
  6. Notify your D&O insurer before responding on the merits.
  7. Weigh settlement against defence, and review guarantees, assets and any director penalty notices.

How Taylor David can help

We act in Brisbane and across Queensland for directors, liquidators, creditors and boards. We can:

  • respond to a liquidator’s or ASIC’s demand, then defend or settle
  • for liquidators and creditors, assess quantum and evidence, then run the claim
  • advise boards on solvency and safe harbour
  • guide directors into voluntary administration or restructuring when trading on is unsafe.

This work sits within our insolvency, litigation and reconstruction and turnaround practices.