Insolvency and Directors' Duties FAQ

A company trades while insolvent when it incurs debts at a time when it is unable to pay all its debts as and when they become due and payable. Directors have a duty to prevent this. Personal liability arises under section 588G if a director was aware, or ought reasonably to have been aware, of grounds for suspecting insolvency.

The cash flow test: a company is insolvent if it is unable to pay all its debts as and when they become due and payable. Courts consider multiple indicators including overdue debts, inability to raise finance, creditor pressure, dishonoured cheques, and the overall financial position.

Directors must exercise care and diligence, act in good faith, and not allow the company to trade while insolvent. They should regularly review financial reports, maintain adequate books and records, ensure tax lodgements are current, and seek professional advice promptly when solvency concerns arise.

Introduced in September 2017, section 588GA provides a defence to insolvent trading liability if the director, after becoming aware of insolvency concerns, starts developing one or more courses of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.

The director must ensure employee entitlements are being paid, tax reporting obligations are up to date, and they are taking reasonable steps to ensure proper books and records are maintained. The director must also be taking appropriate advice from a suitably qualified adviser.

A formal insolvency process where the company's directors appoint a registered liquidator as voluntary administrator. The administrator investigates the company's affairs and presents options to creditors: a deed of company arrangement (DOCA), return to directors' control, or liquidation.

A DOCA is a binding agreement between the company and its creditors, proposed by the administrator and approved by creditors at the second creditors' meeting. It typically involves a fund or payment plan that provides creditors with a better return than liquidation while allowing the company to continue trading.

A company's shareholders resolve to wind up the company voluntarily and a registered liquidator is appointed. The liquidator realises assets, investigates the company's affairs, adjudicates creditor claims, and distributes proceeds according to the statutory priority. The company is then deregistered.

A creditor, director, shareholder, or ASIC can apply to the court for an order to wind up a company. The most common ground is insolvency (failure to comply with a statutory demand). The court appoints a registered liquidator. This process is also called compulsory liquidation.

A formal written demand by a creditor for payment of a debt of at least $4,000 (increased from $2,000 in 2021) that is due and payable. The company has 21 days to pay, reach agreement, or apply to the court to set it aside. Failure to comply creates a presumption of insolvency.

A Declaration of Independence, Relevant Relationships and Indemnities is a document the insolvency practitioner must provide to creditors. It discloses any prior relationship with the company or its directors, and any indemnity arrangements. It ensures transparency about potential conflicts of interest.

In liquidation, the priority is: (1) secured creditors with valid security interests, (2) costs of the liquidation, (3) employee entitlements (wages, superannuation, leave), (4) unsecured creditors on a pro rata basis, (5) subordinated debt, (6) shareholders. Employee priority is subject to statutory caps.

The FEG is a Commonwealth scheme that covers unpaid employee entitlements (wages, annual leave, long service leave, redundancy) when an employer enters liquidation and cannot pay. Employees must claim within 12 months. FEG then seeks to recover from the company's assets as a priority creditor.

A liquidator can claw back certain transactions entered into before liquidation. These include unfair preferences (payments to one creditor ahead of others), uncommercial transactions (at undervalue), unreasonable director-related transactions, and transactions to defeat creditors. The relation-back period is generally 6 months for unrelated parties.

A payment or transaction that gives a creditor more than they would receive in a liquidation, made when the company was insolvent (or became insolvent as a result), within the relation-back period (6 months for arms-length creditors, 4 years for related parties). The liquidator can recover the amount for distribution to all creditors.

Yes, in several circumstances: insolvent trading (section 588G), unreasonable director-related transactions, breach of duty leading to loss, holding out as a director, and for unpaid employee superannuation guarantee charges. Directors can also be liable for tax debts under director penalty notices from the ATO.

The ATO can issue a director penalty notice making directors personally liable for unpaid PAYG withholding and superannuation guarantee charge. If the company lodges its returns on time, directors can remit the penalty by placing the company into administration or liquidation within 21 days. Late lodgement removes this option.

Introduced in January 2021, the simplified restructuring process is available to companies with liabilities under $1 million. The company retains control while a restructuring practitioner helps develop a plan. Creditors vote on the plan without a meeting. It is designed to be faster and cheaper than voluntary administration.

ASIC registers and regulates insolvency practitioners, monitors compliance with insolvency provisions, can investigate suspected offences (including insolvent trading), apply for winding up orders, and take enforcement action against directors and practitioners. ASIC also maintains the Published Notices website for insolvency events.

Voluntary administration typically costs $20,000 to $100,000+ depending on the company's size and complexity. Creditors' voluntary liquidation ranges from $10,000 for simple matters to over $100,000 for complex cases. Practitioners charge hourly rates approved by creditors, and costs are paid from the company's assets as a priority.