Our ‘Australian Restructuring and Insolvency Guide’, is a practical resource when facing distressed situations, enforcement options and insolvency processes in Australia. It brings together the key legal principles and the commercial considerations that typically arise when matters move from stability to stress.
The guide is presented as a series of focused sections, each designed to stand alone as a practical reference for live matters.
While the series focuses on Australian law, it is also relevant to overseas practitioners and stakeholders dealing with Australian restructures, insolvencies, distressed investments, cross-border recovery, and creditor strategy.
Series roadmap
Across 13 parts, the series covers:
Part 1 – General | Part 8 – Security |
Part 2 – Types of liquidation and restructuring processes | Part 9 – Clawback and related-party transactions |
Part 3 – Insolvency tests and filing requirements | Part 10 – Groups of companies |
Part 4 – Directors and officers – (this article) | Part 11 – International cases |
Part 5 – Matters arising in a liquidation or restructuring | Part 12 – Quick reference |
Part 6 – Creditor remedies | Part 13 – Update and trends |
Part 7 – Creditor involvement and proving claims |
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Part 4
Part 4 examines the duties, liabilities and powers of directors and officers in the context of insolvency and restructuring. It covers insolvent trading and other sources of personal liability, the statutory defences and safe harbour protections available to directors, the relevance of creditor interests as insolvency approaches, and the effect of formal insolvency appointments on directors’ powers and functions.
Directors and officers
Directors’ liability – failure to commence proceedings and trading while insolvent.
- If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?
Directors have a statutory duty to prevent a company from incurring debts when the company is insolvent or becomes insolvent by incurring this debt, and there are reasonable grounds to suspect so, and the director is or a reasonable person in such position would be aware of such grounds. A breach may give rise to civil liability, including compensation orders and pecuniary penalty orders. This duty applies not only to formally appointed directors but also to de facto and shadow directors. Where the failure is dishonest, criminal prosecution may be brought by ASIC, with penalties including fines or imprisonment. Directors may also be disqualified from managing corporations under section 206C of the Corporations Act 2001 (Cth).
Further consequences may include certain transactions to be void or voidable if company formally enters liquidation. Examples are unfair preferences and uncommercial transactions.
Directors’ liability – defences
What defences are available to directors and officers in the context of an insolvency or reorganisation?
- A director may avoid liability for insolvent trading under section 588G of the Corporations Act 2001 (Cth) if one of the statutory defences in section 588H applies. These include:
- Reasonable expectation of solvency – the director had reasonable grounds to expect, and did expect, that the company was solvent at the time the debt was incurred and would remain solvent.
- Illness or good reason – the director did not take part in management due to illness or other proper cause.
- Reasonable reliance – the director reasonably relied on a competent person to provide information about the company’s solvency.
- All reasonable steps taken – the director took all reasonable steps to prevent the debt being incurred, including efforts to appoint an administrator or restructuring practitioner.
In addition, safe harbour protection is available under section 588GA of the Corporations Act 2001 (Cth), where, after suspecting insolvency, the director begins developing a course of action reasonably likely to lead to a better outcome for the company than immediate liquidation, and the debts are incurred directly or indirectly in connection with that course of action. Conditions include paying employee entitlements, lodging tax returns, and maintaining proper records.
Directors bear the evidential burden for establishing any of the above defences. These defences do not act as a shield against liability for other breaches such as failure to act with care and diligence or improper use of position
Finally, under section 1317S of the Corporations Act 2001 (Cth), courts may relieve a director from liability if they acted honestly and having regard to the circumstances of the case, ought fairly to be excused.
Shift in directors’ duties
- Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?
Directors do not owe a separate or independent duty to creditors. However, when a company is insolvent or nearing insolvency, directors must consider the interests of creditors as part of their overarching duty to act in good faith in the best interests of the company.
This position was confirmed by the High Court in Spies v R [2000] HCA 43 [93]-[95], where the Court held that directors owe duties to the company, not directly to creditors, but must take creditor interests into account as the financial position of the company deteriorates.
Directors’ powers after proceedings commence
- What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?
When a company enters voluntary administration or liquidation, directors and officers are not removed from office, but their powers are suspended. Under section 198G (1) of the Corporations Act 2001 (Cth), a company officer must not exercise any power or perform any function of that office without:
- the written approval of the external administrator,
- the leave of the court, or
- permission under another provision of the Act.
During voluntary administration, the administrator assumes control over the company’s business, property and affairs, and directors are obligated to assist the administrator. In liquidation, the liquidator manages the company’s affairs, and officers must cooperate but cannot act independently.
If a receiver is appointed over all or substantially all of the company’s assets, they assume effective control of the company’s property, but directors retain limited residual powers and continue to owe duties (Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782; 92 WN (NSW) 199 at 209 per Street J; Oswal v Burrup Fertilisers Pty Ltd [2013] FCAFC 9 at [63]-[77]), including assisting the receiver.
Next, Part 5
Part 5 examines the legal and practical issues that arise once a company enters a formal insolvency or restructuring process. It covers stays on creditor enforcement, the continuation of business operations, post-appointment financing, asset sales, the treatment of contracts and intellectual property, privacy considerations, and the use of arbitration and other dispute resolution processes.
If you are a director, officer, creditor or adviser dealing with a company in financial distress, the timing and evidence behind each decision matter. We can help assess exposure, preserve safe harbour options, manage continued trading risk, and respond quickly where control of the company is shifting. Our restructuring and insolvency work is designed to be commercial, evidence-disciplined, and aligned to the outcome that matters, whether that is protection, recovery, stabilisation, or an orderly external administration.
Further Information
For further information about directors’ duties in distressed situations, insolvent trading risk, safe harbour protections, and the effect of formal insolvency appointments on directors’ powers, please contact the author of this article.
