Insolvent trading: a director's guide to section 588G
Section 588G of the Corporations Act sets out the duty of a director to prevent insolvent trading. The duty matters to every director because it makes the company's solvency a continuing board responsibility, and because the consequences of getting it wrong can be significant. This guide explains the duty in plain terms. It is general information, not legal advice, and a director who is concerned about solvency should seek advice promptly.
What the duty is
Section 588G applies where a company incurs a debt while it is insolvent, or becomes insolvent by incurring that debt, and at the time there were reasonable grounds to suspect that the company was insolvent or would become so. A director can contravene the duty if they were aware there were grounds for suspecting insolvency, or if a reasonable person in a like position would have been aware. In short, the duty asks directors to be alert to the company's ability to pay its debts and to avoid taking on new debts when the company cannot meet them.
What insolvency means
Insolvency in this context means being unable to pay all debts as and when they become due and payable. This is a cash flow concept rather than a simple comparison of assets and liabilities on the balance sheet. A company can hold valuable assets and still be insolvent if it cannot turn them into cash in time to pay creditors. Because the test is about timing of payments, directors need a current view of the company's cash position and of the debts falling due, not only an annual snapshot.
Reasonable grounds to suspect
The duty turns on whether there were reasonable grounds to suspect insolvency. Suspicion is a lower threshold than certainty: it is a real, not idle, apprehension that the company may be unable to pay its debts. Warning signs that may give rise to such grounds can include continuing losses, overdue taxes, pressure from creditors, difficulty obtaining finance, and an inability to produce timely financial information. Directors are expected to take reasonable steps to stay informed, and cannot rely on simply not having looked. The standard is measured against a reasonable person in a like position.
The safe harbour
Section 588GA provides a safe harbour that, in certain circumstances, can carve out civil liability under section 588G. Broadly, it can apply from the time a director starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than immediate administration or liquidation. The safe harbour is subject to conditions, including matters such as keeping up with employee entitlements and tax reporting obligations, and it is fact specific. It exists to encourage directors to attempt a genuine turnaround rather than ceasing trade prematurely, but reliance on it depends on meeting its requirements, so advice is important.
Practical steps when solvency is in question
When solvency is uncertain, directors generally act on several fronts. They obtain current and reliable financial information, including cash flow forecasts, so the board is deciding on facts rather than hope. They consider each new debt carefully before it is incurred. They keep up with employee entitlements and tax reporting, which are relevant to the safe harbour. They take advice from a suitably qualified adviser early, and they document the board's reasoning and the steps being taken. Acting early gives the board more options; delay tends to narrow them. The aim is a considered, evidence-based response rather than either panic or denial.
How Quorum helps
Cohiva Quorum helps the board keep solvency on the agenda, distribute financial papers and cash flow information ahead of meetings, and minute the board's deliberations and decisions when solvency is in question. A clear, dated record of what the board considered and decided supports directors who later need to show the steps they took. Quorum helps you comply and supports your obligations; the entity and its officers remain responsible for compliance.
Part of the Cohiva platform
Cohiva Quorum is part of the Cohiva platform at https://www.cohiva.com. When a board resolution about solvency or a related engagement needs signing, you can route it through Cohiva Sign for e-signatures so the signed document flows back into the minute book.