Changing directors when the company is close to insolvent

A director who sees insolvency coming often asks whether they can resign, or whether somebody else can take the role. The Corporations Act answers both, and the answers are narrower than most people expect.

A company does not go bankrupt

• Bankruptcy is personal. It happens to individuals, under the Bankruptcy Act 1966.
• A company goes into voluntary administration, liquidation or receivership. Different regime, different Act.
• The director's exposure is personal anyway. That is the point of the section below: the company's debt becomes the director's problem.

The duty that bites

Section 588G applies before anything formal happens. A single debt incurred triggers it:

This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Act.

Subsection (2) is where the contravention sits, and it does not require the director to have known:

By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware.

• Paragraph (b) is the one that catches people. Ignoring the accounts is no defence, because the test asks what a reasonable person in that position should have known.
• It is per debt, not per year. Each debt incurred while the company is insolvent is its own contravention.
• Subsection (2) is a civil penalty provision, and subsection (3) creates an offence on top of it.

Can you change director?

A company can appoint a new director at any time. Leaving is the part the Act restricts.

• A director cannot resign out of an empty board.

The resignation of a director of a company does not take effect if, at the end of the day that the resignation is to take effect, the company does not have at least one director.

• Nor can the members vote the last one off the board. Section 203CA(1) voids such a resolution by members of a proprietary company, where the company would end that day with no director.
• And resigning late moves the date forward. Under section 203AA(1) the resignation takes effect on the day the person stopped being a director. That holds only where notice reaches ASIC within 28 days. Otherwise it takes effect on the day the written notice reaches ASIC.
• So a quiet departure with a late filing leaves them a director in the meantime. Every debt the company incurs in that window is inside section 588G for them.

Section 203AA(2) lets ASIC or the Court fix the earlier date. Subsection (3) says the Court must not do so unless satisfied it is just and equitable. That is an application, not a formality.

What to do instead of resigning

• The accounts need to reach a point where solvency is assessable. The reasonable person test in 588G(2)(b) runs against the information a director should have had.
• New debt waits while the position is unclear. The section triggers debt by debt.
• The safe harbour is worth reading. Subdivision C of Division 3 of Part 5.7B carries the heading "Safe harbour from breach of duties", and contains section 588GA. It is conditional, and the conditions are the whole of it.
• Advice early beats advice late. Every option in this area narrows as the company nears insolvency.

This article is general information about the Corporations Act provisions, not legal advice, and does not take account of your client's circumstances. It is current as at 12 September 2026 and quotes Compilation No. 148, compilation date 27 August 2026. Personal bankruptcy is a separate regime under the Bankruptcy Act 1966 and is not covered here. The current compilation is worth checking before anybody acts.