The warning signs
Insolvency is the inability to pay debts as and when they fall due. It is a cash-flow test, not a balance-sheet one — a company with substantial assets can be insolvent if it cannot pay this week's creditors.
- Ongoing losses and deteriorating cash flow
- Creditors outside terms, and on stop-supply
- Overdue tax and superannuation
- Payment arrangements being sought repeatedly
- Facilities at their limit
- Special arrangements with key suppliers
- Legal action or a statutory demand
- Inability to produce accurate, current accounts
The last one matters more than it sounds. Directors who cannot say with confidence what the company owes are already in difficulty, and it removes any realistic defence to an insolvent trading claim.
Director duties when solvency is in doubt
Insolvent trading creates personal liability
Under section 588G of the Corporations Act 2001 (Cth), a director who allows a company to incur debts while it is insolvent, where there were reasonable grounds to suspect insolvency, can be personally liable for those debts. Civil penalties and, in serious cases, criminal liability can also follow.
Unpaid tax and superannuation carry separate exposure: the ATO can issue a director penalty notice making a director personally liable, and for unlodged amounts that liability may not be avoidable by later appointing an administrator.
The practical point: get advice early, when options exist. Directors who seek advice at the first sign of trouble usually have several courses available. Directors who wait until a winding-up application is served usually have one.
Safe harbour
Safe harbour protects a director from insolvent trading liability while they are developing a course of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.
It is not automatic and it is not a shield for inaction. The conditions include keeping employee entitlements up to date, keeping tax lodgements current, maintaining proper books and records, and obtaining appropriate advice. Documentation matters: a director relying on safe harbour must be able to show what they did, when, and why it was reasonable.
The options
| Option | Suits | Control |
|---|---|---|
| Informal restructure | Early-stage difficulty, cooperative creditors | Directors retain control |
| Small business restructuring | Liabilities under $1 million, viable business | Directors remain in control |
| Voluntary administration | Larger or more complex, possible DOCA | Administrator takes control |
| Liquidation | No viable future | Liquidator takes control |
Small business restructuring is the option most under-used. For a company with liabilities under $1 million and an underlying viable business, it allows directors to stay in control while a restructuring plan is put to creditors — a genuinely different proposition from administration.
If you are the creditor
Where a company owes you at least $4,000, a statutory demand under section 459E of the Corporations Act requires payment within 21 days. Non-compliance creates a presumption of insolvency supporting a winding-up application. The 21-day period to set aside a demand under section 459G is absolute and cannot be extended.
Do not use a statutory demand where the debt is genuinely disputed — it can be set aside with costs against you. See our litigation page on debt recovery generally.
If the company enters administration or liquidation, prove your debt promptly, and check whether you hold a registered security interest on the PPSR. An unsecured creditor ranks behind secured creditors and employees; a properly registered PPSR interest can change your position entirely.
Payments you have already received
A liquidator can recover payments made to creditors in the period before liquidation as unfair preferences, where the creditor received more than it would have in a winding up. This surprises creditors who thought a debt was resolved.
Defences exist — most importantly good faith receipt without reasonable grounds to suspect insolvency, and running account arguments. If you receive a demand from a liquidator, do not simply pay it: these claims are frequently negotiable and sometimes defeasible.
What it costs
- Fixed fee for an initial solvency review
- Urgent advice on director penalty notices
- Safe harbour advice quoted per matter
- Statutory demands at a fixed fee
- Stage estimates for disputed claims
- We work with insolvency practitioners
Frequently asked questions
When it cannot pay its debts as and when they fall due. It is a cash-flow test rather than a balance-sheet one, so a company with substantial assets can be insolvent if it cannot meet current liabilities. Warning signs include overdue tax and superannuation, creditors outside terms, facilities at their limit, and an inability to produce accurate current accounts.
Yes. Under section 588G of the Corporations Act 2001 (Cth), a director who allows a company to incur debts while insolvent, where there were reasonable grounds to suspect insolvency, can be personally liable for those debts. The ATO can also issue a director penalty notice creating personal liability for unpaid tax and superannuation.
Protection from insolvent trading liability while a director is developing a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation. It is not automatic: conditions include keeping employee entitlements and tax lodgements current, maintaining proper books and records, and obtaining appropriate advice.
A process for companies with liabilities under $1 million and an underlying viable business, allowing directors to remain in control while a restructuring plan is put to creditors. It is a genuinely different proposition from voluntary administration and is under-used by businesses that would qualify.
Potentially. A liquidator can recover payments made before liquidation as unfair preferences where the creditor received more than it would have in a winding up. Defences exist, including good faith receipt without reasonable grounds to suspect insolvency, and running account arguments. Do not simply pay — these claims are often negotiable.
More information
Considering Insolvency. There may be other options. Get advice from our expert team.
Insolvency lawyers Rockhampton
Insolvency is the legal term for the point at which you or your business is faced with insurmountable debt.
There is inherent risk in buying and operating any business. In a best-case scenario, these risks will be identified early on and you will have strategies to address any legal or financial difficulties before they spiral out of control.
In a worst-case scenario, your business may be forced to close due to insolvency. What happens during this time depends on which business structure you’ve chosen.
Personal insolvency procedures will apply to businesses operated as sole traders or partnerships. This means that if you (and/or your partners) can’t repay business debts, you will have three options, depending on your specific circumstances. These are entering into a debt agreement, entering into a personal insolvency agreement, or voluntary bankruptcy. Of these, voluntary bankruptcy is the most drastic because it generally lasts three years and has significant consequences.
On the other hand, companies facing insolvency are dealt with differently. In many cases, insolvency results in the closing of the company through court liquidation, creditors’ voluntary liquidation or members’ voluntary liquidation. This is a controlled process in which any relevant activities end and assets are sold to pay creditors. During this time, any remaining sums of money are allocated to the shareholders. Companies faced with overwhelming debt may also go into voluntary administration or receivership.
If your business is struggling and potentially facing insolvency, we are here to help. Working with you and your financial advisors, we will find the best legal option to address your unique circumstances.
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This page is general information about the law as it applies in Queensland, current as at 2026. It is not legal advice and does not take your circumstances into account. Figures set by regulation are indexed and change. Speak to one of our lawyers before acting.