By Glenn O’Kearney, Registered Liquidator and Registered Bankruptcy Trustee
Australia recorded 14,722 corporate insolvencies in FY2024–25, the highest level since 1999–2000. Behind each of those figures sits a director asking a different question to the one covered in our voluntary administration guide: not “is my company insolvent”, but “am I personally exposed for continuing to trade”. The second question carries consequences that follow a director personally, well beyond whatever happens to the company.
This guide explains what trading while insolvent means under the law, what happens to a director who keeps trading anyway, and the protection available to directors who act early rather than waiting for a creditor to force the issue.
What “Trading While Insolvent” Actually Means
A company is insolvent when it cannot pay its debts as and when they fall due. Insolvent trading is what happens next: a director allows the company to incur a new debt while knowing, or while a reasonable person in the same position would have suspected, that the company was already insolvent or would become insolvent as a result. This duty sits under section 588G of the Corporations Act 2001 and is explained in ASIC’s guidance for directors. It applies to each director individually rather than to the company as an entity.
Directors rarely miss the moment because they are careless. They miss it because the warning signs build gradually and each has a plausible explanation on its own. Overdue supplier terms get put down to a slow month. An ATO payment plan feels like breathing room, but it is often a sign the business cannot meet ordinary obligations from ordinary trading. Repeated short-term refinancing, rolling one facility into another to cover last month’s shortfall, is one of the clearest signals that cash flow has stopped following revenue. None of these signs proves insolvency alone. Left unaddressed, together they build a pattern a court or liquidator reads very differently in hindsight.
What Happens if a Director Keeps Trading Anyway
The consequences split into two distinct categories, and directors searching for “insolvent trading penalties” are usually trying to work out which one applies to them.
Civil consequences attach to the debt itself. A director who breaches section 588G can be held personally liable for the debts the company incurred while trading insolvent, and a liquidator or ASIC can pursue compensation orders to recover that amount directly from the director. This exposure sits outside the usual protection of the corporate structure: it is the company’s separate legal personality that normally shields personal assets, and insolvent trading is one of the main ways that shield is pierced.
Criminal consequences are a separate, higher threshold. They apply only where the insolvent trading involved dishonesty, not simply a failure to notice or act on warning signs in time. A director who keeps trading through poor judgement faces civil exposure; a director who does so dishonestly faces criminal charges on top of it. Conflating the two overstates the risk for directors who are merely slow to act, and understates it for directors who know the truth and trade anyway.
Beyond civil and criminal exposure, ASIC can disqualify a director from managing companies, either administratively where the director was an officer of two or more failed companies within a seven-year period, or by court order where their conduct is connected to a single company’s failure. A disqualification order affects a director’s ability to run any company, beyond the one that failed, often the consequence directors underestimate most.
The Safe Harbour: Protection for Directors Who Act Early
Most content on this topic stops at the penalties. What gets under-served is the protection built into the same part of the Act for directors who act before the position becomes irreversible.
The safe harbour provisions, commonly cited as section 588GA and consistent with our voluntary administration guide, protect a director from insolvent trading liability while they develop and act on a course that is reasonably likely to lead to a better outcome for the company than an immediate administration or liquidation. That could mean restructuring debt, renegotiating with creditors, or bringing in professional advice to work through the options properly, rather than simply continuing to trade and hoping the position improves.
The protection is conditional on timing, not on outcome. Safe harbour is available to directors who start developing a genuine plan while options are still open, not as a shield that appears retrospectively once a company has already failed. Directors sometimes assume it is a general defence available whenever they can point to good intentions. It does not work that way: acting early is what unlocks it, not the fact of having acted at all. Safe harbour also depends on the company already being up to date with employee entitlements and tax lodgements when the debt is incurred. Without that, the protection is not available no matter how sound the turnaround plan is.
What to Do if You Are Worried About Personal Exposure
The single most useful thing a director can do is get advice before an informal workout attempt, not after it fails. By the time creditors are applying real pressure, or ASIC starts asking questions, several earlier options have usually closed.
A registered liquidator or restructuring practitioner assessing this situation is not simply checking whether the company can pay its bills today. They are looking at the trajectory: whether cash flow follows revenue or new borrowing, whether debts are growing faster than the company’s ability to service them, and whether a genuine turnaround plan exists or trading is continuing on hope alone. That assessment determines whether safe harbour, a formal restructuring process, or another pathway fits.
One exposure worth flagging without expanding on it here: someone acting as a director in substance, without being formally appointed, is not automatically protected just because their name is not on the ASIC register. De facto and shadow director liability is a real, separate risk that deserves its own detailed treatment, not a paragraph inside this guide.
If you are concerned about personal exposure, get advice now
If any of the warning signs above sound familiar, the conversation to have is with a registered liquidator, and the time to have it is before creditors or ASIC force the issue. Glenn O’Kearney is a Registered Liquidator and Registered Bankruptcy Trustee at GT Advisory & Consulting, a Gold Coast insolvency and restructuring practice. An initial conversation is confidential and carries no obligation.
Contact GT Advisory & Consulting to talk through your options. Call 07 5635 2600 or visit Level 3, 140 Bundall Road, Bundall QLD 4217.
This article is general information only. It is not legal or insolvency advice and should not be relied on as a substitute for advice from a registered practitioner about your specific circumstances.