Insolvency

Insolvency is when a corporation can’t pay its debts as and when they fall due.

Directors have a responsibility to ensure that the company is able to pay its debts as and when they fall due.

What is insolvency?

A corporation is insolvent if it cannot pay its debts when they are due.

Being insolvent does not necessarily mean the corporation has run out of money completely. A corporation may own valuable assets but still be insolvent if it cannot pay its bills on time.

Example

A corporation may own:

buildings
vehicles
equipment

but if it does not have enough cash to pay wages, suppliers, loan repayments or tax obligations when they are due, it may be insolvent.

Insolvency is likely to exist when:

the corporation is short of cash and other liquid funds that enable it to pay its debts
current liabilities exceed current assets
total liabilities exceed total assets.

Why should directors understand insolvency?

Directors are responsible for overseeing the corporation's financial position and ensuring the corporation can meet its financial obligations.

Directors' legal responsibilities

Under the CATSI Act, every individual director has a number of legal duties, including duties to act with care and diligence, act in good faith in the best interests of the corporation, and not improperly use their position or information. Directors also have a specific duty not to allow the corporation to trade while insolvent.

Failing to meet the duty to not allow the corporation to trade while insolvent can have serious consequences. Individual directors can be fined or go to prison for allowing a corporation to trade while insolvent.

Tax and superannuation obligations

Directors should also ensure the corporation meets its tax and superannuation obligations on time. If the corporation doesn’t pay them by the due date, current and former directors may be personally liable in some circumstances.

Check the ATO website for more information on the director penalty notice regime.

Warning signs that your corporation may be insolvent

bills are regularly paid late
loan repayments are overdue
creditors, suppliers or their lawyers are demanding payment
suppliers will only provide goods or services after receiving payment
the corporation is running short of cash or has less cash available than usual
the corporation is losing money (making a loss) year after year
income has decreased significantly
expenses or operating costs have increased significantly
funding has stopped or may stop
the bank will not lend any more money
the corporation is relying on loans or other borrowing to pay day-to-day expenses
customers are not paying money they owe to the corporation
the corporation is delaying payments to creditors because it does not have enough cash
financial reports are unavailable, inaccurate, missing or out of date
the corporation is selling important assets to pay debts

One warning sign does not necessarily mean the corporation is insolvent. However, several warning signs occurring at the same time may indicate serious financial difficulties and should be investigated as soon as possible.

Questions directors should ask - solvency

This checklist helps directors ask the right questions about cash flow, upcoming obligations, financial risks and warning signs.

What to do if your corporation is insolvent

If the directors know, or have good reasons to believe, the corporation is insolvent, they must take action. Do not ignore it, and do not wait. The corporation should not take on more debt and stop trading until it has taken further action.

If a corporation is experiencing financial difficulties, directors should:

understand the corporation's financial position
monitor cash flow closely
review financial reports and ask questions if they have concerns
take action as soon as possible.

The earlier directors identify financial problems, the more options may be available to address them and avoid insolvency.

Content last updated: 28 October 2026