The first sign is rarely dramatic. A supplier switches you to cash on delivery. A superannuation payment misses its date. Then a letter from the ATO, or a statutory demand from a creditor who has run out of patience. At some point it becomes undeniable: your company cannot pay its debts as and when they fall due. If you are a director, that moment changes everything. The law no longer treats hoping things pick up as a plan, and the choices you make from here determine both the company's future and your own exposure.
The options, plainly
When a company can't pay its debts, there are really four paths. The first is to keep trading and try to trade out of trouble while negotiating with creditors. The second is an informal restructuring: payment plans, refinancing, selling assets, or a capital injection, agreed with creditors outside any formal process. The third is voluntary administration, a formal process under Part 5.3A of the Corporations Act 2001 (Cth) that gives the company breathing space while an administrator works out whether the business can be saved. The fourth is liquidation: winding the company up, selling its assets and distributing the proceeds to creditors.
Two assumptions need correcting before you weigh anything else. First, keeping trading is not a neutral option. If the company is insolvent and you continue to incur debts, you may be personally liable for insolvent trading. Second, the option that can look most attractive, moving the business into a new company and leaving the debts behind, is illegal phoenix activity and can itself be a crime. And one apparent distinction collapses on inspection: voluntary administration and liquidation both hand control to an external professional. The real question is whether the business has a future worth saving, or whether your job is to manage an orderly exit.
The factors that should drive the decision
Six factors separate a defensible decision from a costly one.
Whether the company is actually insolvent
Solvency is a cash-flow test, not a balance-sheet test. Under s 95A of the Corporations Act 2001 (Cth), a company is solvent only if it can pay all its debts as and when they become due and payable. A company with healthy assets but no cash to meet this month's debts is insolvent in law.
The usual warning signs are statutory demands, garnishee notices, unpaid pay as you go (PAYG) withholding and superannuation, payments bouncing, creditors refusing supply, and directors quietly paying some creditors ahead of others. Insolvency is judged with hindsight, and the law asks what a reasonable director in your position would have known, not what you chose to look at. Before deciding anything, model the company's cash flow honestly over the next three to six months: what is owed, what is coming in, and when. If that model shows the company can't meet its debts as they fall due, you are working from the insolvent side of the line.
Your exposure for insolvent trading
Section 588G of the Corporations Act 2001 (Cth) imposes a duty on directors to prevent the company incurring a debt when it is insolvent, or when there are reasonable grounds to suspect it is. A contravention is a civil penalty matter and can also support compensation orders, which means what a director can be ordered to pay is tied to the debts the company ran up, not a fixed fine. Where the failure is dishonest, it is a criminal offence carrying fines and imprisonment.
The Act also gives you a way to stay on the right side of the line. Under s 588GA, the safe harbour, you are not liable for insolvent trading if, once you suspect the company may be or become insolvent, you start developing a course of action reasonably likely to lead to a better outcome for the company, and the debts are incurred in connection with that course of action. The safe harbour rewards acting early and acting deliberately. In practice it means:
- Document the decision: board minutes setting out the position, the options considered and the course adopted.
- Get the numbers done: cash-flow forecasts and, where the stakes justify it, an independent accountant's or restructuring adviser's assessment.
- Keep creditors informed: a plan creditors can see is harder for a court to characterise as reckless trading.
The safe harbour does not excuse every duty. It is a shield against insolvent trading liability, not against breaching other directors' duties, and it ends if you stop pursuing the course of action or it stops being reasonably likely to produce a better outcome.
Whether you can restructure informally
Many companies trade through a cash crunch with an informal deal: a payment plan with the tax office, extended terms from suppliers, a director's loan, or the sale of a non-core asset. Informal restructuring is cheaper and less public than formal administration, and it is often the right call when the problem is genuinely short term.
But an informal arrangement has a critical weakness: it binds only the creditors who agree to it, and it gives the company no moratorium. One unpaid creditor can still serve a statutory demand under s 459E of the Corporations Act 2001 (Cth) for a debt, or debts totalling, at least $2,000 that are due and payable, and the company has 21 days to pay, secure or compound the debt. If the company fails to comply, s 459C presumes it is insolvent, and the creditor can rely on that presumption in a winding-up application for the next three months.
That is the practical test for informal restructuring: can you keep every creditor on side, including the ATO, for long enough to trade out? If one creditor can tip the company into a presumption of insolvency, the informal route is not a plan, it is a delay.
Voluntary administration or liquidation
When the company can't pay its debts and the informal route is exhausted, the choice is between trying to save the business and winding it up. The comparison is worth setting out:
Voluntary administration
- Who starts it: the directors, by board resolution appointing an administrator.
- Effect: a statutory moratorium, so creditors can't enforce their claims without the administrator's consent or the court's leave.
- Process: the administrator convenes a first meeting of creditors within 8 business days, investigates the company's affairs, and reports. Within about 20 business days, or 25 around December and Easter, the creditors meet again and choose between returning the company to the directors, accepting a deed of company arrangement (DOCA), or winding the company up.
- Deed of company arrangement: the company must execute the DOCA within 15 business days of the creditors' meeting. The deed binds creditors and sets out how the company's affairs will be dealt with, often paying creditors less than in full over time.
Liquidation
- Who starts it: creditors can apply to the court for a winding-up order, relying on the presumption of insolvency where available, or the company's members or directors can resolve to wind the company up voluntarily.
- Effect: the company stops trading, a liquidator takes control, realises the assets and distributes the proceeds to creditors in the statutory order.
- End state: once the winding up is complete, the company is deregistered and ceases to exist, and the liquidator reports on the directors' conduct to ASIC.
The factor that decides between the two is simple: is there a business here worth saving? Voluntary administration exists to give a viable business a chance to restructure. If there is no realistic prospect of the business trading profitably again, administration just adds cost and delay to an outcome liquidation would reach more cheaply.
Your personal exposure to tax debts
Company debts are usually the company's problem, not yours. Unpaid tax is the big exception. Under the director penalty regime in Schedule 1 to the Taxation Administration Act 1953 (Cth), directors become personally liable for the company's unpaid PAYG withholding and superannuation guarantee charge. The ATO can issue a director penalty notice and then recover the amount from you personally, without needing to prove insolvent trading.
The obligation continues until the company pays, an administrator or small business restructuring practitioner is appointed, or the company begins to be wound up. That is a feature worth understanding: engaging a formal process can cut off personal liability for tax debts that would otherwise follow the directors after the company fails. It is one more reason unpaid superannuation and withheld wages should never be the debts you quietly defer.
Whether any asset movement looks like phoenixing
Phoenix activity is the practice of transferring a failing company's assets to a new entity so the old company's creditors get nothing, then continuing the same business. It is not merely frowned upon. The Corporations Act 2001 (Cth) defines a creditor-defeating disposition as a transfer of property for less than market value that prevents the property being available to creditors in a winding up, and makes it an offence for officers to make one or to procure one.
Directors who transfer contracts, plant or stock to a new company controlled by themselves or family members, hoping the debts stay behind, are the classic target. Even where the conduct falls short of a criminal prosecution, the disposition can be voided and the property recovered for creditors, and the conduct can support personal liability and disqualification. If the business genuinely should continue, the way to do it is a sale at market value through a documented process, usually with advice, so the arrangement is a restructure and not a phoenix.
How an Artificer Legal insolvency lawyer can help
None of this is a decision to make from a kitchen table. An Artificer Legal practitioner working with you on the company's insolvency will:
- Stress-test the solvency position and the cash-flow model: so you know which side of the line the company is on before you commit to a path.
- Advise on insolvent trading exposure and the safe harbour: including what to document and what a defensible course of action looks like in your industry.
- Respond to statutory demands: within the 21-day window, including applying to set a demand aside where the debt is genuinely disputed.
- Negotiate with creditors and the ATO: including director penalty notice exposure for PAYG withholding and superannuation.
- Run the formal process: from the board resolutions appointing an administrator to the creditors' meetings, the deed of company arrangement, and the choice of liquidator.
- Structure any sale or restructure: so that it is a genuine transaction at market value, not a creditor-defeating disposition.
The point of the advice is not to make the decision for you. It is to make sure the decision you do make is taken from accurate numbers, within the deadlines the Act imposes, and with the personal exposure mapped out before, not after, the event.
Act before the company's position decides for you
The single most expensive mistake in this area is not choosing the wrong option. It is waiting until the options have disappeared. Every week the company trades while insolvent adds to the pool of debts a liquidator, or a creditor, may later argue you are personally responsible for, and the safe harbour only protects directors who start developing a plan once they suspect insolvency, not those who keep trading and hope. The 21 days of a statutory demand, the 8 business days to the first creditors' meeting, the 15 business days to execute a deed: the Act is full of deadlines, and every one of them runs against a director who delays.
To summarise the position: a company is insolvent when it cannot pay its debts as they fall due, and solvency is judged on cash flow, not assets. Directors who trade on from that point risk insolvent trading liability unless they can show a safe-harbour course of action. Informal restructuring works only while every creditor, including the ATO, stays on side. Voluntary administration buys a moratorium and a chance to save the business through a deed of company arrangement, while liquidation is the orderly end of the company. Tax debts can follow directors personally, and moving assets to dodge creditors is a criminal risk, not a strategy. The thread through all of it is time: the earlier a director confronts the position with proper advice, the more options remain.