Creditor-initiated insolvent trading claims

Insolvent trading is a serious form of director misconduct in Australian corporate law. It arises when a company incurs debts while it is insolvent and its directors fail to prevent those debts from being incurred.

Under section 588G of the Corporations Act 2001 (Cth), directors have a duty to prevent insolvent trading. If they breach this duty, they can be held personally liable to compensate for the debts pursuant to section 588M.

While liquidators typically bring these claims, section 588M(3) creates an unusual exception: it allows individual creditors to sue directors directly, provided the company is in liquidation and the liquidator consents. These cases are rare. However, it is important that creditors are aware that if they are dissatisfied with a liquidator not pursuing a claim, they have the power to pursue it in their own right.