Prevent insolvent trading (s 588G)
Directors must prevent the company incurring debts while insolvent — or face personal liability.
Who must comply
Directors of companies in financial distress.
What triggers it
Reasonable grounds to suspect insolvency.
When due
Immediately on suspicion of insolvency.
Evidence required
Cash flow forecasts, board minutes, safe harbour adviser engagement, restructuring plan.
Max penalty
Civil penalty up to $1.65M (individuals), compensation orders to creditors, plus criminal liability for dishonest conduct
Summary
Section 588G makes directors personally liable for debts incurred while a company is insolvent, or becomes insolvent by incurring the debt. Safe harbour (s 588GA) protects directors who develop a course of action reasonably likely to lead to a better outcome than immediate liquidation — provided employees are paid and tax obligations met. The simplified debt restructuring regime offers an alternative path for eligible small companies.
Enforced by
Source legislation
Entity types
Topics
Related obligations
- CWLTHComply with directors' general law and statutory dutiesDirectors owe duties of care and diligence (s 180), good faith (s 181), no improper use of position (s 182) or information (s 183).
- CWLTHAppoint voluntary administrator under Part 5.3A Corporations ActDirectors can place company in voluntary administration when insolvent — pause creditor claims for restructuring window.
- CWLTHSimplified Debt Restructuring (small business)Small companies (<$1M liabilities) can use SDR to restructure without full external admin.
- CWLTHApply for a Director Identification Number (Director ID)Every director needs a Director ID before appointment — apply via ABRS.
- CWLTHPay company PAYG/GST/SG or face Director Penalty Notice (DPN)Directors personally liable for unpaid company PAYG, GST + SG via DPN regime.
- CWLTHRegister security interests on the PPSRSecured creditors must register on the Personal Property Securities Register to preserve priority.
Frequently asked questions
- Who must comply with Prevent insolvent trading (s 588G)?
- Directors of companies in financial distress.
- What triggers Prevent insolvent trading (s 588G)?
- Reasonable grounds to suspect insolvency.
- When is Prevent insolvent trading (s 588G) due?
- Immediately on suspicion of insolvency.
- What is the maximum penalty for Prevent insolvent trading (s 588G)?
- Civil penalty up to $1.65M (individuals), compensation orders to creditors, plus criminal liability for dishonest conduct
- What evidence is required for Prevent insolvent trading (s 588G)?
- Cash flow forecasts, board minutes, safe harbour adviser engagement, restructuring plan.
Source: https://asic.gov.au/regulatory-resources/insolvency/. Rules Mate is not a law firm. Always verify against the live regulator source before acting.