As the pressures continue to mount across the building and construction sector, directors are finding themselves at growing personal risk. In Part 2 of our series “The Rise of Insolvency in the Building and Construction Industry,” we explore one of the most misunderstood (and dangerous) areas for directors: insolvent trading.
More than 3,000 construction businesses collapsed last year. That alone should be a wake-up call. But many directors still hold serious misconceptions about what insolvency really means.
“People think that as long as their balance sheet looks good, they’re in the clear. But that’s not how Australian insolvency law works. The true test is cash flow: can you pay your debts as and when they fall due?”
Liam Bailey, O’Brien Palmer
What is Insolvent Trading?
Insolvent trading occurs when a company continues to incur debts after it has become insolvent. Under Australian law, if you’re a director and your company can’t pay its debts when they’re due, you’re required to act. And if you don’t? You can be held personally liable.
This doesn’t mean every cashflow hiccup is a problem. The law allows for “temporary illiquidity,” but once your debts start falling behind regularly, particularly tax debts and supplier payments, you must take active steps.
The Warning Signs of Insolvency:
✨ Regular overdue ATO debts and missed superannuation
✨ More than 25-30% of supplier payments falling outside trade terms
✨ No meaningful plan or action to address outstanding liabilities
The Importance of Record Keeping
Another critical issue directors overlook is poor bookkeeping. Today, many businesses rely on platforms like Xero or MYOB, assuming that having those digital records is enough. It isn’t. You also need proper source documentation, such as invoices and statements, to prove the accuracy of your records.
If a liquidator is appointed and you can’t provide full documentation, there is a presumption that the company was insolvent during that time. That can be extremely costly.
What is The Liquidator’s Role?
A liquidator’s role is not to punish, but to recover money for creditors. However, they can (and do) pursue insolvent trading claims if they believe there’s a chance of recovery. Even if there are valid defences like illness or external obstacles, the burden of proof is high and often hard to meet.
Directors of construction businesses are under unprecedented pressure. You don’t need to navigate these challenges alone. If you suspect your company may be insolvent, talk to someone early. Engaging an insolvency expert may allow you to explore all of your options before it’s too late to take positive action.
“Too many people rely on well-meaning but unqualified advice. You need the right structure, the right plan, and someone to help you implement it.”
Stay tuned for Part 3 of this series, where we’ll explore strategies to protect your assets and avoid common traps in the building and construction sector.
Liam Bailey
Managing Partner, O’Brien Palmer
Need confidential advice? Get in touch with our team at O’Brien Palmer. We’re here to help.
📞 Call us at 1300 545 133 for a confidential chat.
📩 Email us at: obp1@obp.com.au