Is my company trading while insolvent?
It is a worrying phrase, and a lot of owners encounter it for the first time exactly when they are least equipped to think clearly about it. This is a plain-English explanation of what insolvent trading actually means in Australia, how solvency is judged, what it can mean for you personally, and why the most useful response to genuine doubt is almost always the same one: get advice early, while you still have choices.
Last updated
What does trading while insolvent mean?
Australian directors carry a specific duty: not to allow the company to take on new debts when it is insolvent, or where taking on the debt would tip it into insolvency. Continuing to incur debts in that state is what the law calls insolvent trading. It is worth being precise about what is and is not caught. The duty is not breached simply because the company is losing money or going through a rough patch. It is about incurring fresh obligations the company has no reasonable prospect of being able to pay. A business can be unprofitable for a stretch and still be solvent, and the point of the rule is to make directors stop and confront the position rather than keep ordering stock and signing contracts on hope alone.
The cash-flow test and the balance-sheet test
Solvency is generally judged two ways. The cash-flow test asks the practical question: can the company pay its debts as and when they fall due? This is the test Australian courts treat as decisive, and it is about timing as much as totals, because a business with valuable assets it cannot quickly turn into cash can still fail it. The balance-sheet test asks the related question: do the company's assets exceed its liabilities? The two usually move together, but not always, and the cash-flow position is the one that bites first. In practice, persistent late payments, an inability to obtain further finance, outstanding tax debts, and creditors demanding payment are the kinds of signs that point towards a cash-flow problem rather than a passing squeeze.
What is the director's exposure?
The reason insolvent trading matters so much is that it is one of the few situations where the company's losses can reach a director's own pocket. If a director allows the company to incur debts while it is insolvent, they can be made personally liable for those debts, and there can be civil penalties as well. That is a sharp departure from the usual position, where the company is a separate legal person and its debts are its own. The exposure is not designed to punish honest directors who hit hard times; it exists to discourage the kind of trading-on that leaves creditors worse off. But it is real, and it is why the duty deserves to be taken seriously rather than waved away as a technicality.
What should I do if I am not sure?
Uncertainty is the normal state here. Very few directors have a clear moment where they know the company crossed a line; more often there is a creeping doubt that things are not adding up. The right response to that doubt is not to wait for certainty, because certainty usually arrives too late to do anything useful with. It is to get advice promptly from an accountant, an insolvency practitioner, or a lawyer who can look at the real numbers and tell you where you stand. Getting advice early is also protective: directors who confront the position and act on proper advice are in a far stronger position than those who kept trading and hoped. If in doubt, that is the doubt worth acting on.
How to see the position clearly
Most of the anxiety around insolvent trading comes from not being able to see the position clearly enough to judge it. The cash-flow test is far easier to answer when you can see what is due in the weeks ahead rather than only what is in the account today, and far harder when your numbers live in a shoebox or a stale spreadsheet. Keeping an honest, current view of whether the company can meet its obligations as they fall due is the most practical safeguard a director has, both for the business and for themselves. The free Business Risk Self-Assessment is a quick, no-account way to take stock of where you sit before you raise it with an adviser. This is general information, not legal advice.
Offermore reads your live Xero data and refreshes every day, so whether the company can meet what is due stays visible rather than buried. If any of the terms above are unfamiliar, our plain-English glossary of insolvency terms explains insolvent trading, safe harbour, and the rest in plain language.
For a wider view of what happens if a company cannot recover, our article on what happens when a business can't pay its debts walks through the formal options and what they mean for directors.
14-day free trial · No credit card required