A director must stop an Australian company taking on new debts once there are reasonable grounds to suspect it is insolvent, or would become insolvent by taking them on. A director who breaches the duty in section 588G of the Corporations Act 2001 can be ordered to pay the creditors' losses personally. Safe harbour (s588GA) can protect a director who is actively developing a credible turnaround plan, but only while the company keeps paying employees and lodging its tax. A foreign parent should also know it can be liable itself under s588V.
Why subsidiaries are exposed
An Australian subsidiary often has no cash of its own. It runs on intercompany funding, transfer-priced service fees and a parent's promise to keep it solvent. That works until the group changes priorities. A local director who can't see the group's funding decisions is the one left holding the s588G risk. ASIC's guide for directors, Regulatory Guide 217 (reissued 6 December 2024), applies to every director. RG 217.13 says the duty also reaches people who aren't formally appointed but act as directors, or whose instructions the board is used to following. That can include parent-company executives. See shadow directors and parent control.
The test: cash flow first
Under s95A, a company is insolvent if it can't pay all its debts as and when they become due and payable. RG 217.22 says this is mainly a cash-flow test: will expected cash coming in cover liabilities as they fall due? The balance sheet matters too. RG 217.23 points to whether new capital or borrowings can realistically be raised in time, which for a subsidiary usually means the parent. RG 217.24 separates insolvency from a temporary lack of liquidity.
Records matter more than founders expect. If the company hasn't kept proper financial records, s588E lets a court presume it was insolvent for that period in civil proceedings, unless the director proves otherwise (RG 217.25). Keeping those records is a separate duty under s286, and ASIC's director obligations page is blunt that you remain responsible even when a bookkeeper does the work.
Warning signs ASIC lists
RG 217's appendix (Table 4) sets out indicators that should prompt a director to investigate. The ones that show up most in foreign-owned subsidiaries:
- continuing trading losses, funded by the parent with no written commitment
- overdue PAYG withholding, GST or super guarantee contributions
- creditors moving the company to cash-on-delivery or demanding special payments
- no further support available from related entities, such as shareholders or a holding company
- no accurate, timely management accounts or reliable forecasts
- directors or key staff resigning over the company's finances
- an auditor's going-concern qualification.
Overdue tax isn't only a solvency signal. It is also the route to personal liability through a director penalty notice.
What a breach costs
Section 588G works at two levels (RG 217.15–217.17):
| Civil (s588G(2)) | Criminal (s588G(3)) | |
|---|---|---|
| Trigger | Director aware of grounds to suspect insolvency, or a reasonable person would be | Director suspected insolvency and the failure to prevent the debt was dishonest |
| Consequence | Compensation equal to the loss, a pecuniary penalty of up to the greater of 5,000 penalty units or 3 times the benefit gained or detriment avoided, and disqualification | Up to 2,000 penalty units, 5 years' imprisonment, or both |
In practice the claim usually comes from a liquidator. RG 217's own example is a liquidator recovering $456,789 of unpaid debts from a sole director who had no defence.
The defences in s588H
RG 217.19 lists four defences to a civil claim. You must prove that when the debt was incurred, you:
- had reasonable grounds to expect, and did expect, that the company was solvent and would stay solvent
- reasonably relied on a competent, reliable person to report on solvency, and expected solvency based on what they told you
- didn't take part in management because of illness or another good reason
- took all reasonable steps to prevent the debt, which can include appointing an administrator or restructuring practitioner.
The business judgment rule doesn't apply to s588G, so "it was a reasonable commercial call" is not a defence. A court can still relieve a director who acted honestly and ought fairly to be excused (ss1317S and 1318).
How safe harbour works
Under s588GA(1), summarised at RG 217.28, a director is protected from civil liability for a debt if:
- after starting to suspect insolvency, they start developing one or more courses of action reasonably likely to lead to a better outcome than immediately appointing an administrator or liquidator
- the debt is incurred in connection with that course of action or in the ordinary course of business
- the debt is incurred while the plan is live. Protection ends when a reasonable time passes without taking action, when the director stops pursuing the plan, when it is no longer reasonably likely to produce a better outcome, or when an administrator or liquidator is appointed.
RG 217.83 lists factors that help show a plan qualifies: properly informing yourself about the financial position, preventing misconduct, keeping proper records, getting advice from an appropriately qualified entity who has enough information, and developing or implementing a restructuring plan. The safe harbour sits alongside your other duties. RG 217.84 says the s180–184 duties keep applying throughout (see director duties).
When safe harbour is not available
Unless a court orders otherwise, RG 217.77 says safe harbour does not apply if, when the debt is incurred, the company is failing to:
- pay employee entitlements that are due, including superannuation, or
- meet its tax lodgement obligations
and that failure is less than substantial compliance, or is one of two or more such failures in the last 12 months (s588GA(4) and (6)). It can also be lost after the event if the director doesn't give a later controller, administrator or liquidator the reports and records the Act requires.
For a small company, a separate safe harbour applies while a small business restructuring practitioner is appointed under s453B, for debts incurred in the ordinary course of business or with the practitioner's consent (s588GAAB, RG 217.32).
The parent's own exposure
Foreign groups often assume the subsidiary is a liability firewall. It mostly is, but s588V is the exception. Under RG 217.33, a holding company can be liable for a subsidiary's debt incurred while the subsidiary was insolvent, or that made it insolvent, if there were reasonable grounds to suspect insolvency and either:
- the holding company, or one of its directors, was aware of those grounds, or
- given how much control the parent has over the subsidiary's affairs, it is reasonable to expect that it or its directors would be aware.
Tight group control raises the second limb. The parent has its own safe harbour under s588WA: it isn't liable if it took reasonable steps to make sure safe harbour applied to each subsidiary director and the debts, and safe harbour does in fact apply (RG 217.34). So the parent has an interest in the local board following a proper safe harbour process, not in the local director quietly signing.
A workable solvency routine for a subsidiary board
- Monthly pack: 13-week cash flow, aged creditors, ATO and super status, and intercompany balances, sent to every director.
- Funding in writing: a support letter or facility that covers the next 12 months and is re-confirmed when the group's plans change.
- Escalation points agreed in advance: for example, any ATO debt not on a payment plan, or a creditor stop-supply.
- Early advice: RG 217's key principles are to monitor, investigate, get advice and act in a timely way. Waiting for the parent's next budget cycle is usually what makes a director's position indefensible.
Our director's decision protocol treats new borrowing, guarantees and anything that raises a solvency question as matters to escalate, never to sign routinely. We aren't restructuring advisers. If the company is in difficulty, the right first call is a registered liquidator, restructuring adviser or insolvency lawyer. If the company is past saving, see closing a company in Australia.
This page is a general summary current on 27 October 2026. It doesn't replace legal, financial or insolvency advice on your company's position.
Frequently asked questions
Does the business judgment rule protect a director from an insolvent trading claim?
No. ASIC's RG 217 notes that the business judgment rule in s180(2) does not apply to a breach of s588G. The protections that matter are the s588H defences and safe harbour.
Is a parent company letter of support enough to keep trading?
It can help, but only if the parent can actually pay and the letter's terms cover the debts being incurred. Your lawyer should tell you whether a particular letter is legally binding, and the board should re-check the parent's position rather than treat the letter as permanent.
Can an overseas parent company be liable for the subsidiary's debts?
Yes. Under s588V a holding company can be liable for debts its subsidiary incurs while insolvent, where the parent or its directors knew, or should reasonably have known, that there were grounds to suspect insolvency.
What breaks safe harbour fastest?
Falling behind on employee entitlements, including super, or on tax lodgements. Unless a court orders otherwise, failures that are less than substantial compliance, or two or more failures in 12 months, take the protection away.
Official sources
- ASIC RG 217 Duty to prevent insolvent trading: Guide for directors asic.gov.au
- ASIC RG 217 (PDF, December 2024) download.asic.gov.au
- ASIC: Managing your director obligations asic.gov.au
Checked against these sources on . Fees, thresholds and forms change: confirm with the source before you lodge.
General information about Australian law and practice, not legal or tax advice for your circumstances. Check the official sources, or ask your adviser, before you act.