Insolvent Trading: When Directors Become Personally Liable

Velocity Legal

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Key Insights

Insolvent trading can pierce the protection of a company structure. A company usually limits a director’s personal exposure, but that protection is not absolute. If a company incurs debts while insolvent, and a director had reasonable grounds to suspect insolvency, the director may be personally liable for debts incurred during that period. The risk is not limited to large companies; it can arise in small and medium-sized businesses too.
Resigning does not fix debts already incurred. A director may reduce exposure to future debts by resigning, but resignation does not remove liability for debts incurred while they were still a director. Similarly, good intentions are not enough. A director may genuinely believe the business can recover, but the issue is whether that belief was reasonable in light of the company’s financial position at the time.
Early action gives directors more options. Insolvent trading risk usually increases when directors delay difficult decisions. Accurate financial records, early advice from accountants and insolvency lawyers, and consideration of restructuring options such as safe harbour can materially affect the outcome. The earlier directors respond to cash flow pressure, the more options they are likely to have.

Contents

When can a company director become personally liable for company debts?

In Australia, a company structure generally protects directors from personal liability. However, insolvent trading is one of the key exceptions. If a director allows a company to incur debts while it is insolvent, and there were reasonable grounds to suspect insolvency, the director may be personally exposed.

In this episode of Explain That by Velocity Legal, Andrew Henshaw is joined by Insolvency and Restructuring Director Seamus Ryan to discuss how insolvent trading claims arise, what liquidators look for after a company enters liquidation, and what directors should do when financial pressure begins to build.

The discussion covers:

what insolvent trading means for company directors;
when a company may be considered insolvent;
how liquidators investigate potential insolvent trading claims;
why claims often arise after liquidation rather than during trading;
common indicators of insolvency, including cash flow pressure, missed payments and payment defaults;
why resignation does not remove liability for debts already incurred;
the limits of relying on good intentions or hoped-for recovery;
the overlap between insolvent trading, ATO debt and director penalty notices;
post-COVID insolvency and enforcement trends; and
practical steps directors can take when solvency concerns arise.

A practical discussion for company directors, business owners, accountants and professional advisers dealing with insolvency, restructuring, cash flow pressure, liquidation risk or potential director exposure.

For advice on insolvency, restructuring, director exposure or insolvent trading risk, contact Velocity Legal’s Insolvency team.

This podcast in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this podcast.

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