Dodging The Debt Dilemma: Ramsden Lawyers Illuminate Insolvent Trading

Over the past 18 months, the surge in external administrations and heightened media attention on business insolvencies has turned the spotlight squarely onto ‘insolvent trading’. But while the term echoes in boardrooms and headlines, not everyone understands its nuances. Enter Ramsden Lawyers, ready to shed light on this complex subject.

Insolvent Trading Breaking News

In recent news, a company behind failed Couran Cove Island Resort South Stradbroke Operations is rumoured to have traded insolvent’ for almost 2 years, with net losses escalating until its final period of trading, the liquidator has claimed. South Stradbroke’s liquidation commenced on 23 May 2023, with a debt sheet over $1.6 million owed to creditors, staff and the Australian Taxation Office.

The saga has continued well beyond the original liquidation. In March 2026, the Queensland Supreme Court upheld a further $22 million debt owed by the resort’s community body corporate to essential service providers, after electricity, water, gas and sewerage connections to the resort’s roughly 360 properties were disconnected in 2023 over unpaid levies. Hundreds of residents have since abandoned their properties, with remaining owners relying on generators, water tanks and trucked-in services. A further hearing on legal costs is expected. The case is a stark reminder of how unresolved insolvency and governance issues can compound over years, well beyond the initial liquidation.

Breaking Down the Basics

Voluntary administration, corporate insolvency, company liquidation and receivership each carry distinct legal implications. Before considering any of these processes, it’s important to understand what “insolvent trading” actually means.

Under section 588G of the Corporations Act 2001 (Cth), a company is insolvent when it is unable to pay all its debts as and when they fall due. If a company continues operating and incurring further debts while in this position, it is trading while insolvent. Directors who fail to prevent this can be held personally liable, from repaying the debts out of their own pocket through to facing civil penalties or, in serious cases, criminal prosecution.

Is Your Company Solvent? The Test

Identifying insolvency is not as simple as comparing assets to liabilities, particularly in industries such as construction, where payment for work performed is often delayed. Courts primarily apply the cash flow test: whether a company can pay its debts as they fall due, using cash and assets that can promptly be converted to cash, rather than a strict balance-sheet comparison of total assets against total liabilities. Both tests may be relevant, but cash flow is the primary and most commonly applied measure.

Red Flags: Warning Signs of Insolvent Trading

• Mounting tax and superannuation debts
• Persistent losses
• A stuttering cash flow
• Scattered financial documentation
• A glaring absence of cash-flow projections
• Troubles in recovering debts
• Out-of-pattern creditor payments
• Legal notices and financial penalties
• Suppliers demanding cash upon delivery
• Compromising arrangements with specific creditors
• Banking woes: breached overdrafts or loan defaults
• Strained ties with financial partners

For a claim of insolvent trading to stick, one must prove:

• The individual was a director when the debt was incurred;
• The company was, or became, insolvent due to that debt; or
• There were a number of indicators of insolvency.

Directors should also be aware that Australia’s insolvency framework itself is currently under review: the Productivity Commission is examining the broader system, including faster business exit pathways, improved creditor outcomes and expanded safe harbour-style protections, with an interim report due in November 2026. This may influence how insolvent trading laws are applied or reformed in coming years, and directors should keep an eye on developments.

Defending an Insolvent Trading Claim

Ramsden Lawyers regularly advises directors on defences to insolvent trading allegations. The Corporations Act provides several defences, including where a director:

• had reasonable grounds to believe the company was solvent, and continued to be solvent, at the relevant time;
• reasonably relied on information provided by a competent and reliable person responsible for that information;
• was not, due to illness or another good reason, taking part in management when the debt was incurred; or
• took reasonable steps to prevent the company incurring the debt, such as appointing an administrator.

The safe harbour provision under section 588GA of the Corporations Act is another important protection. It shields directors from personal liability for debts incurred while developing and implementing a course of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation. In December 2024, ASIC updated its Regulatory Guide 217 to give directors clearer guidance on qualifying for safe harbour, emphasising that directors must actively monitor solvency, investigate financial difficulty promptly, obtain advice from suitably qualified professionals, and properly document the basis for their decisions. The onus is on the director to prove these requirements were met.

My Company Is Insolvent: What Now?

If your company is facing corporate insolvency, several pathways may be available.

Below is a brief overview of each, to help you understand what is involved before seeking tailored advice.

Receivership

Receivership allows a secured creditor to recover a secured debt. Unlike other insolvency processes, it operates for the benefit of that one creditor rather than creditors collectively. A receiver is appointed to realise specific secured property, most commonly where a bank or other financier holds security over company assets and the company has defaulted under the relevant security agreement.

Liquidation

Liquidation, or “winding up”, involves closing the company, selling its assets and distributing the proceeds to creditors. A liquidator may be appointed by creditors or members in a voluntary winding up, taking control of the company’s affairs to wind it up in an orderly way that benefits creditors as a whole.

Voluntary Administration

Voluntary administration aims to rescue a financially distressed company. The directors’ powers are suspended, and an independent administrator takes control to manage the company’s affairs and report to creditors, who then vote on the company’s future, whether that’s a deed of company arrangement, liquidation, or returning control to directors. The administrator typically recommends whichever outcome is likely to maximise the return to creditors.

If you’re weighing up any of these options, we recommend seeking legal advice as early as possible to identify the most appropriate path for your circumstances. Ramsden Lawyers’ Insolvency team and Dispute Resolution and Litigation Division regularly guide directors and companies through the nuances of corporate insolvency.

Ramsden Lawyers: How We Can Assist

Navigating corporate insolvency and potential insolvent trading exposure can be daunting. Ramsden Lawyers’ team of registered liquidators and insolvency practitioners, spread across the Gold Coast, Brisbane, Sydney and Melbourne, can help guide you through the process.

Worried about the financial health of your company or insolvency implications? Don’t paddle alone in choppy waters. Contact us today to discuss this further.

The content of this article is intended to provide general guidance on the subject matter and must not be relied on as legal advice. Specific advice should be sought about your individual circumstances.