Insolvent trading under section 588G and the safe harbour: the duty and the evidence a defence needs

What section 588G prohibits

Section 588G of the Corporations Act 2001 makes a director personally liable where their company incurs a debt while insolvent, or becomes insolvent by incurring that debt, and there were reasonable grounds at the time to suspect insolvency. The liability attaches to the individual and is enforced against that individual's own assets, not the company's.

Four elements must line up: the person was a director when the debt was incurred; the company was insolvent then, or became insolvent because of the debt; there were reasonable grounds to suspect insolvency; and the director was aware of those grounds, or a reasonable person in a like position would have been.

Insolvency is a cash-flow test, not a balance-sheet test. The Australian Securities and Investments Commission states in INFO 42 Insolvency for directors that a company is insolvent when it cannot pay its debts when they are due. A company with substantial assets is insolvent if they cannot be turned into cash in time to meet the next payroll.

"Director" is broader than the ASIC register suggests. ASIC states in INFO 42 that a person may be a director without formal appointment, if they act in that role or if the appointed directors act on their instructions or wishes. De facto and shadow directors carry the duty, and so does a person who resigned after the debts were incurred.

The underlying obligation is indexed at prevent insolvent trading (s 588G), and it sits alongside the general duties covered in directors' duties under section 180 and the business judgment rule.

When the duty bites: reasonable grounds to suspect

The trigger is suspicion, not proof. ASIC's guidance is explicit that before incurring a new debt a director must consider whether they have reasonable grounds to suspect the company is insolvent or will become insolvent as a result of incurring it. A director who has not looked cannot say the grounds were absent.

ASIC lists warning signs in INFO 42. Five of them are worth treating as hard triggers for a formal solvency assessment:

• incomplete financial records, or disorganised internal accounting procedures
• increasing debt, where liabilities exceed assets
• overdue taxes and superannuation liabilities
• board disputes, director resignations, or loss of management personnel
• problems selling stock or collecting debts

Overdue tax and superannuation is both a solvency warning sign and the trigger for a separate personal liability under the tax law, examined in Director Penalty Notices: the 21-day rule explained.

The first is the most dangerous of the five, because of a presumption that flows from it. ASIC states that where a company can be shown to have failed to keep adequate financial records for a period, the company will generally be presumed to have been insolvent throughout that period. Poor books do not merely make solvency hard to prove; they shift the burden onto the director. The statutory record-keeping obligations that head this off are set out in company registers and registered office obligations.

What insolvent trading exposes a director to

Insolvent trading carries four distinct consequences, and they stack rather than substitute.

The Commonwealth penalty unit is $364 for contraventions committed on or after 1 July 2026, indexed under section 4AA of the Crimes Act 1914. On ASIC's own fines and penalties page, the 5,000 penalty unit maximum for an individual is stated as $1.82 million (checked August 2026). Units are valued as at the date of the contravention: $330 between 7 November 2024 and 30 June 2026, and $313 between 1 July 2023 and 6 November 2024.

The compensation head is usually the larger number: uncapped, payable to creditors, and — ASIC notes — capable of bankrupting a director, which itself disqualifies that person from managing a corporation. Maximum ranges can be modelled with the penalty estimator. The adjacent duty against creditor-defeating dispositions sits alongside it: moving assets out of a failing company below market value is a separate contravention and the gateway to illegal phoenix activity.

The statutory defences

The Corporations Act provides statutory defences to an insolvent trading claim, but ASIC's own position is that directors often find them difficult to rely on if they have not taken steps to stay informed about the company's financial position. Each defence rewards a director who was engaged and punishes one who was not.

The four defences run as follows. First, that the director had reasonable grounds to expect — not merely hope — that the company was solvent and would remain solvent after incurring the debt. Second, that the director reasonably relied on information about solvency supplied by a competent and reliable person who had been made responsible for providing it. Third, that the director did not take part in management at the relevant time because of illness or some other good reason. Fourth, that the director took all reasonable steps to prevent the company incurring the debt, including whether steps were taken towards appointing an administrator.

Two observations follow. The reliance defence requires that the person relied on was competent, reliable and actually tasked with the job. The "all reasonable steps" defence turns on documented action: raising the matter formally, recording dissent, obtaining advice, pressing for an appointment. Silence at the board table is not a step. ASIC's RG 217 Duty to prevent insolvent trading is the primary guidance on how the duty and the defences are applied.

Safe harbour: what section 588GA protects and what it does not

Safe harbour under section 588GA suspends civil liability for insolvent trading while a director is genuinely pursuing a restructuring path that is better for the company than immediate external administration. It is not a defence raised at trial so much as a state the director must already be in when the debt is incurred.

ASIC states the two conditions in INFO 42:

• after the director starts to suspect the company may become or be insolvent, they begin developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator; and
• the debt is incurred directly or indirectly in connection with such a course of action, or is incurred in the ordinary course of the company's business.

Two carve-outs matter more than anything else in the section. Safe harbour is not available while the company is failing to pay employee entitlements by the time they fall due, or failing to give returns, notices and statements required by taxation laws. A company that has stopped paying superannuation, or stopped lodging business activity statements, has already stepped outside the protection — regardless of how good the turnaround plan is.

What safe harbour does not do is equally important. It addresses civil liability for insolvent trading only. It does not touch the general duties of care, good faith and proper purpose. It does not protect against creditor-defeating dispositions. It does not affect a Director Penalty Notice, and it does not touch a personal guarantee — see personal guarantees and director personal liability.

The evidence a safe harbour position is built on

Safe harbour is an evidentiary construct. The director carries the burden of establishing it, and the material must have existed at the time — reconstructed after a liquidator arrives, it is worth very little.

The last row is the one most often missing. Safe harbour ends when the course of action stops being reasonably likely to produce a better outcome, and a director who cannot show when that happened will find the whole period treated as unprotected. Underpinning all of it is the seven-year duty at keep company records for seven years — adequate books are the precondition for defeating the insolvency presumption.

The sequence to run when the numbers turn

Acting in a defined sequence preserves options that disappear once creditors move.

1. Date the suspicion. Record the day and the trigger. Every subsequent protection is measured from it.
2. Get the numbers to a defensible standard. A rolling thirteen-week cash flow forecast, reconciled to the ledger.
3. Clear the two carve-outs. Employee entitlements due and payable, and all tax lodgements, before anything else.
4. Engage an appropriately qualified adviser. Be wary of advisers who approach unsolicited and propose asset transfers.
5. Write the course of action down, with milestones, dates and an abandonment trigger.
6. Test each new debt against the plan before it is incurred, and record the test.
7. Review on the schedule you set and minute the outcome, including a decision to stop.
8. Know the exits. For companies with total liabilities of no more than $1 million, small business restructuring leaves directors in control while a plan is put to creditors. Otherwise the options are voluntary administration or liquidation; solvent closures are covered in closing a company properly.

Use the director duties tool and the compliance calendar to keep the carve-out lodgements from slipping.