Carter Newell, a specialist law firm, has outlined key considerations for company directors facing financial strain, highlighting areas where insurance brokers can offer strategic advice to their business clients.
Australia’s economic environment has placed additional pressure on businesses, with the cash rate peaking at 4.35% from late 2023 to the end of 2024 – the highest level in over a decade – before moderating slightly to 4.10% by February 2025. The elevated interest rates have increased borrowing costs, reduced access to new credit, and placed further stress on cash flows.
According to official data, there was a 39% rise in companies entering external administration during the 2023-24 financial year. Construction and hospitality sectors were among the most affected industries.
Carter Newell said that, in the current environment, directors must stay alert to signs of financial difficulty and act swiftly to meet their obligations under the Corporations Act 2001 (Cth).
Directors are legally required to prevent insolvent trading, meaning they must not allow a company to incur debts if it cannot meet its existing obligations. Under section 588G of the Corporations Act, failure to comply may expose directors to civil penalties, criminal charges, or orders to compensate creditors.
Carter Newell said directors have defences available where they can demonstrate reasonable grounds for believing the company was solvent or that adequate delegation of financial oversight occurred. However, the firm stressed that directors must take proactive steps to stay informed about the company’s financial position.
“Ignorance is not an excuse. Directors are required to take positive steps to inform themselves of the solvency of their company. Officers should actively monitor the company’s solvency and look for early warning signs of financial distress,” the law firm said.
Penalties for breaches include fines up to $660,000, potential imprisonment, civil penalties up to $1.65 million, and liability for creditor losses.
In circumstances of financial distress, directors may consider several pathways, including informal workouts, voluntary administration, or the small business restructuring process introduced for eligible firms.
Safe harbour protections under section 588GA allow directors to limit personal liability if debts are incurred during a reasonable attempt to restructure the business. To qualify, directors must maintain proper financial records, act to prevent misconduct, and seek professional advice.
“For a director to be excused from liability for insolvent trading, it must ensure the company has paid the entitlements of its employees that are payable and given returns, notices, statements, applications, or other documents as required by taxation laws,” the law firm said.
Voluntary administration enables directors to appoint an external administrator when insolvency is likely. The administrator manages the business, aiming to restructure or, where appropriate, negotiate a Deed of Company Arrangement (DoCA) to improve creditor returns compared to liquidation.
Ultimately, creditors determine the company’s future by voting on whether to proceed with a DoCA, return control to directors, or liquidate the business.
For smaller entities, the small business restructuring regime provides an alternative. Companies with liabilities under $1 million may develop a restructuring plan while directors retain control, assisted by a small business restructuring practitioner. Plans are voted on by creditors after 20 business days of preparation.
Eligibility requires companies to be up to date with employee entitlements and taxation reporting.
The emphasis on director responsibilities comes at a time when demand for directors’ and officers’ (D&O) insurance is increasing.
According to Global Insurance Law Connect’s (GILC) D&O Global Trends 2025 report, heightened regulatory scrutiny, ESG considerations, and economic volatility are influencing underwriting decisions.
The survey of 24 international markets found that 74% of respondents cited legislative and regulatory shifts as the leading market driver. ESG issues were identified by 57%, while 52% pointed to macroeconomic uncertainty. Cyber threats were another significant concern.
The report noted a clear trend toward higher claim volumes, with 61% of respondents observing more litigation and 55% reporting greater success rates for claimants.
