The law of insolvent trading under s 588G of the Corporations Act seems eternally unsatisfactory and always open to review. It aims to deter proscribed conduct by directors and incentivise their early proactive steps; and in default, to provide creditors with some recompense for their losses. It probably achieves neither of these aims in most cases.
While the effectiveness of deterrence can be a difficult process to measure, the section seems to have limited effect in regulating director conduct. Two recent insolvent trading findings against directors are perhaps illustrative of the insignificant impact of deterrence in those and comparable cases.
As to its default remedy of recompense, we know little, that is, to what extent litigation claims, even where ‘successful’, produce any return to creditors once the costs of the litigation process are taken into account. The law or the courts should require this disclosure. In fact, it is pointless proceeding to law reform without it – we would be again legislating in the dark.
That then leaves the creditors in the position of having to look after themselves. Knowing more about whom they are dealing with in any commercial dealings would help – but business records are opaque, with no access to director IDs, no free access to ASIC records, no beneficial ownership register, and more, or less.
This brief review covers where this law is at in light of the 2023 PJC Report on Corporate Insolvency and other more recent developments, including the review of directors’ duties in New Zealand.
The two cases were:
- Trinco (NSW) Pty Ltd (in liq),[1] where the NSW Supreme Court ordered a de facto director pay $10,059,175.52 for insolvent trading by his company over 3 years, from 2018 until its liquidation in 2021. The appointed director was bankrupt.
- Preiner & Anor v Shin & Anor [2025] NSWDC 341, judgment of over $275,000 for insolvent trading over 4 years from 2018 or 2019 to 2023; plus a claim against the holding company for $89,562.73 under s 588V(1) for 3 years from 2020 to 2023. A safe harbour defence under s 588GAAA did not succeed.[2]
2023 Parliamentary Joint Committee report
Insolvent trading and safe harbour are two of the many items for review recommended by the 2023 PJC Report and they cannot be assessed on their own.
An earlier 2022 report on the safe harbour provisions in sections 588GA and 588GB of the Corporations Act made certain routine recommendations, of which the government accepted several.[3] The 2023 PJC Report’s recommendation 7 was that the government implement these in advance of any further review, and consider referring the remainder to a comprehensive review.
The PJC said that the prevalence of directors
“trading on their companies and incurring debt long past the point a business was viable should be ‘front and centre’ in any comprehensive review, given the damage it inflict[s] on creditors, the economy, and directors themselves”.
Maybe.
Post PJC
Since 2023, ASIC has responded to the PJC Report and updated its guidance: Duty to prevent insolvent trading: Guide for directors December 2024 but nothing beyond has come from the government.
Nor has there been anything from the industry, for example as to the data supporting or otherwise the extent of insolvent trading financial outcomes, or safe harbour.
Academia
More useful work has been done by academics.
Taylor and Lombard[4] in their 2024 trans-Tasman comparison[5] of the laws, and those of the UK, find that the Australian and UK jurisdictions align in so far as both place greater emphasis on director flexibility and risk-taking than New Zealand’s more regulatory approach; thereby highlighting the need for the aims of insolvency law to be first settled, as recommended by the PJC.
As the authors explain, the “eco-systems” in which the laws operate generally include the high proportion of SME companies, with limited assets and funding available and the low value of a director’s personal assets. Whatever insolvent trading laws exist, these contexts are often insurmountable, at least under the current system.
The authors query the PJC’s suggestion that Australia’s duty under s 588G be replaced with the UK’s ‘wrongful trading’ standard, but noting that
“any wholesale law reform efforts in Australia should proceed with caution and carefully consider the current points of criticism against the statutory insolvent trading provisions in the context of the framework as a whole, and how successful this might be in achieving the desired balance between competing policy objectives, rather than emphasising bits and pieces from various jurisdictions”.
In the meantime, in August 2023 the New Zealand Supreme Court issued a significant judgment settling many uncertainties in relation to the reckless trading duties under NZ law, but at the same time calling for a review of these provisions, Yan v Mainzeal Property and Construction.[6] The liability imposed was in the order of NZ$40 million, necessarily in respect of misconduct occurring over a period of years.
Review of directors’ duties in New Zealand
A review of directors’ duties has since been commenced in August 2025 by the NZ Law Commission which will also consider the Mainzeal decision.[7] Importantly, a focus is to be given to transparency of business dealings, through director IDs and such, making it easier to identify all the companies with which a director is associated.
When examined from that director duties perspective, law reform consideration might preferably be given to abandoning the insolvent and reckless trading duties so that directors’ decision making when a company is in financial distress is assessed according to whether it meets the standard required by directors’ duty of care, skill and diligence. At least it may be equally as ineffective as s 588G.
The past
Many issues have been raised in the past. Going back, in my Does insolvent trading work? The UK may not think so. – Murrays Legal, I review Australian, Singaporean and UK law.
In the UK, in light of what was seen as too little action taken by liquidators, the secretary of state was given powers to intervene to both disqualify and seek compensation from directors,[8] this despite this regime being said to have “caused some consternation” in relation to its inter-relationship with the statutory routes of recovery, and its potential disruption of statutory priorities and pari passu distribution.[9]
The UK government saw the misconduct of wrongful trading as constituting a ‘market failure’ in relationships between corporations and their creditors, evidenced by creditors’ inability to effectively manage the risks created by limited liability.
Also, Australia’s system of having a harsh insolvent trading law and then an ameliorative safe harbour was rejected in NZ, whose laws often compare favourably with Australia’s over-regulatory approach: Duties of directors of insolvent companies – New Zealand Supreme Court decision – Murrays Legal. Whether safe harbour in Australia is operating as intended might well need to be examined.
As to two other studies, back in 2015, in a comparative review of Australia with the UK’s 214 Insolvency Act, the author concluded by saying that
“what is remarkable is that the Australian remedy appears to have been no more effective over its near 50 year history than s.214 has been in its 27 years.[11]
In fact, according to that author, the problem of insolvent trading is over-stated, at least in the UK.
And as to recoverability of sums ordered to be paid, another study showed many directors adopted bankruptcy, a s 588G claim being a provable debt.[12]
The high proportion of matters that proceed by way of default or undefended judgment suggest a lack of interest by directors in the outcome.
An opaque business environment
Also, and as explained earlier, insolvent trading in Australia has to be seen in the opaque commercial environment – or eco-system – in which it occurs, presenting several ‘opportunities’ for undetected breaches of the law:
- the ability for businesses to trade through complex unregistered trust structures;
- the lack (for creditors) of open access to Director IDs or ASIC searches;
- the legislative support, by default, of allowing reliance for cash flow on unremitted tax withholdings, with single touch payroll restricted from requiring reporting and payment; and
- the complexity of corporate insolvency law and tax law generally.
Typically, Australia concedes much to business interests and then has to write laws to counter business’ inevitable exploitation of the concession.
In any event, irrespective of government delay, AI will transform this problem: What is the future of insolvency practice? – Murrays Legal
Creditors?
And we accept the mantra of seeking to protect creditors while not extracting data that would show that creditors are not much protected at all. This lack of protection is perhaps understandable given the limited self-help many creditors themselves adopt. In the two cases cited earlier, we would have to query what measures creditors took to assess the business with which they were trading over the years and what trading terms were imposed.
Legislative complexity
We should also take note of the law reform approach of NZ; the PJC noted its much simpler insolvency processes, in contrast to Australia’s, which the PJC has recommended requires a major holistic systems-based review. Australia’s insolvent trading laws are more complex than those in NZ.
As for other examples, Australia’s winding up provisions are said to be more complex and likely to be inaccessible for many SMEs without professional assistance, and the time and expense required to navigate would be higher.[13]
And NZ’s pooling law is found in one section, s 271, of its Companies Act 1993; Australia’s law extends over 17 sections – s 571 to s 597L – and 10 pages of the Corporations Act.
Behavioural issues
And if there were one area of insolvency law calling for behavioural input it is insolvent trading. It is never likely to have much or any deterrent impact, at least at the SME level, with the long uncertain lead time and the many perverse behavioural influences impacting: see my The empty threat of insolvent trading (2009) Insolvency Law Bulletin 126; and Safe harbour – some inherent behavioural issues to overcome – Murrays Legal.
As the Assistant Minister, Dr Andrew Leigh MP, explains, behavioural economics better explain human decision‑making, blending the insights of psychology and economics and helping ensure design choices that work better in the real world. The real world is that of SME companies trading insolvent for some months or years, with limited assets, and with directors already personally liable under guarantees or tax laws.
In trying to reach that group, it may be that ASIC sought advice when re-issuing its revised 2024 insolvent trading guide,[10] but it is evident it did not. Reform of insolvent trading law without attending to these perverse incentives for directors won’t be effective.
Little point
There is enough analysis in what I have outlined. There is little point in further review in Australia in light of the absence of:
- financial data on the actual outcomes for creditors of the pursuit of insolvent trading claims.
- a decision about the (achievable) aims of insolvency, and insolvent trading, and
- a more transparent business environment.
We might well await the outcome of the NZ review.
In the meantime, maybe the status quo is preferred. As one liquidator told me,
“I make my money out of insolvent trading demands”.
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[1] [2025] NSWSC 993
[2] [2025] NSWDC 341.
[3] Government Response to the Review of the insolvent trading safe harbour
[4] Taylor, L, & Lombard, S (2024), Statutory principles governing director conduct when a company is in financial distress – a Trans-Tasman comparison. Journal of Corporate Law Studies, 24(2), 515–566. https://doi.org/10.1080/14735970.2024.2403225. See also Mark Wellard’s Insolvent Trading: Director Accountability for Minimal Returns to Creditors in Liquidations (2023) 31 Insolv LJ 85.
[5] “Statutory principles governing director conduct when a company is in financial distress – a Trans-Tasman comparison”
[6]Yan v Mainzeal Property and Construction Limited (in liq) [2023] NZSC 113; 1 NZLR 296.
[8] Impact Assessments: Summary Document, Small Business, Enterprise and Employment Act, March 2015.
[9] The Secretary of State for Business, Energy And Industrial Strategy v Eagling [2019] EWHC 2806 (Ch) (01 November 2019); Secretary of State For Business and Trade v Barnsby (Re Pure Zanzibar Ltd) (Rev1) [2023] EWHC 2284 (Ch) (20 September 2023) (bailii.org).
[10] RG 217 – Duty to prevent insolvent trading: Guide for directors in December 2024.
[11] R Williams, What Can we Expect to Gain from Reforming the Insolvent Trading Remedy? (2015) 78 Modern Law Review 55.
[12] See R Williams, Civil Recovery from Delinquent Directors, (2015) 15(2) Journal of Corporate Law Studies pp.311-339.
[13] Professor Lynne Taylor, NZ.
