What are the warning signs, and what must directors do?
A company is insolvent if it cannot pay all its debts as and when they become due (s 95A, Corporations Act 2001 (Cth)). ASIC’s warning signs include continuing losses, creditors paid outside terms, overdue taxes and legal action.
Directors who let an insolvent company incur debts, when there are reasonable grounds to suspect insolvency, risk civil penalties and compensation claims (s 588G).
The safe harbour (s 588GA) can protect directors developing a course of action reasonably likely to lead to a better outcome for the company. It generally does not apply if employee entitlements are unpaid or tax lodgements are overdue.
How does voluntary administration work?
The board resolves in writing that the company is, or is likely to become, insolvent and appoints an administrator (s 436A). The administrator takes control and directors’ powers are suspended.
Moratorium. Court proceedings against the company are stayed unless the administrator consents or the court gives leave (s 440D). A creditor secured over all or substantially all of the property can still enforce during a short “decision period” of 13 business days (ss 9 and 441A).
Timetable. The first creditors’ meeting is held within eight business days of appointment (s 436E). The second meeting is usually held within 25 business days of appointment, or 30 around Christmas or Easter (s 439A).
At the second meeting, after the administrator’s report, creditors decide between three outcomes (s 439C):
- a deed of company arrangement (DOCA), which can let the business continue
- ending the administration and returning control to the directors
- winding up the company.
Personal guarantees. In administration, a guarantee of company debt cannot be enforced against a director, or their spouse or relative, without court leave (s 440J). This is a pause, not a release.
How does small business restructuring work?
Eligibility under Part 5.3B requires (s 453C; reg 5.3B.03, Corporations Regulations 2001):
- total liabilities of no more than $1 million when the restructuring begins
- no restructuring or simplified liquidation of the company, or involving its directors, in the past seven years (limited exemptions apply).
Before the plan is proposed, due employee entitlements must be paid and tax lodgements brought up to date.
The board resolves that the company is, or is likely to become, insolvent and appoints a registered liquidator as restructuring practitioner (s 453B). Directors keep control, but transactions outside the ordinary course need the practitioner’s consent or a court order (s 453L).
The company has 20 business days to propose a plan, extendable by up to 10. Creditors vote in writing, usually within 15 business days. A majority in value of voting creditors must approve, and related creditors cannot vote. A moratorium applies, including on directors’ guarantees. If the plan fails, the restructuring ends.
What does liquidation involve?
In a creditors’ voluntary liquidation, members pass a special resolution to wind up the company and appoint a registered liquidator.
The liquidator realises assets, investigates and pays creditors. Investigations can lead to insolvent trading and other claims against directors. There is no pause on enforcing personal guarantees.
Eligible companies with liabilities of $1 million or less may use a streamlined “simplified liquidation”, without creditors’ meetings.
What happens to director penalty notices and employees?
Director penalty notices (DPNs). Under the Taxation Administration Act 1953 (Cth), directors can be personally liable for unpaid PAYG withholding, GST and superannuation guarantee charge. A non-lockdown penalty is remitted if, within 21 days after the notice is given, the company (Sch 1 s 269-30):
- pays the debt
- appoints an administrator or restructuring practitioner, or
- begins to be wound up.
The 21 days run from the day the ATO posts the notice. If the liability was not reported within three months of its due date, a “lockdown” DPN generally applies. Only payment then remits it.
Employees. The Fair Entitlements Guarantee (FEG) is a last-resort safety net for certain unpaid entitlements. It applies only in liquidation or bankruptcy, and excludes superannuation.
How do directors choose between the options?
| Voluntary administration | Small business restructuring | Liquidation | |
|---|---|---|---|
| Who controls | Administrator | Directors | Liquidator |
| Eligibility | Insolvent or likely to become insolvent | Liabilities up to $1 million; entitlements and tax lodgements up to date | Insolvent company |
| Timing | Creditors decide within about 25 business days | Plan in 20 business days; vote within about 15 more | No fixed end date |
| Outcome | DOCA, return to directors, or liquidation | Plan binds creditors if accepted | Company wound up |
The choice turns on debts, viability, creditor support and directors’ personal exposure.
Each practitioner must be a registered liquidator and must disclose relevant relationships to creditors. Taylor David is not an insolvency practitioner. We advise directors and companies and work alongside registered liquidators.
Reform status (September 2026): most proposed insolvency reforms now sit with the Productivity Commission, so the current rules apply. See Insolvency reform on hold.
How Taylor David can help
Our insolvency and reconstruction and turnaround practices act for directors, companies, creditors, financiers and insolvency practitioners. For directors, we:
- advise boards on solvency, directors’ duties and the safe harbour
- assess which option suits the company, and its eligibility
- prepare board resolutions and brief registered liquidators
- advise on personal guarantees, DPNs and claims against directors
- negotiate DOCA proposals and restructuring plans
- act in related litigation.