Can Creditors Sue Directors? A Guide to Creditor Rights Against Directors in Australia

One of the most common questions Astris Law is asked about companies in default (or more generally, caught in deals gone wrong) is: "Can I go after the directors personally?" The short answer is that Australian law does not, as a general rule, give creditors a direct cause of action against directors for breach of directors' duties. Directors owe their duties to the company, not to individual creditors (Spies v R [2000] HCA 43). However, there are several statutory and equitable mechanisms through which creditors can reach directors personally - and some of them are more powerful than most people realise.

1. Insolvent Trading: The Most Direct Pathway (ss 588G-588M)

This is the most direct statutory mechanism for creditors to pursue directors. Section 588G of the Corporations Act 2001 (Cth) imposes a duty on directors to prevent a company from incurring debts while insolvent. A director contravenes s 588G(2) where:

• The person is a director at the time the company incurs a debt
• The company is insolvent at that time, or becomes insolvent by incurring that debt
• There are reasonable grounds for suspecting insolvency
• The director was aware of those grounds, or a reasonable person in a like position would have been aware of them

The Creditor's Direct Right of Action (s 588M(3))

Critically, s 588M(3) allows an individual creditor to recover compensation directly from the director as a debt due to the creditor. This is an unusual exception to the general principle that only the company (via its liquidator) can pursue directors for breach of duty. The creditor can recover an amount equal to the loss or damage suffered in relation to the debt incurred while the company was insolvent.

However, there are procedural hurdles. Under ss 588R, 588S and 588T, a creditor must first seek the liquidator's written consent to bring proceedings. If the liquidator refuses consent, the creditor must follow a prescribed notice process and may need to apply to the court for leave. This creates a minimum 9-month timeline before a creditor can proceed without liquidator cooperation. Importantly, a creditor cannot pursue an insolvent trading claim if the liquidator has already commenced proceedings against the director.

Real Cases Where Creditors Recovered

In a District Court of Queensland decision, a creditor (Tremco) successfully sued a director's wife under s 588M after establishing that she was a de facto director of the debtor company, Kadoe Pty Ltd. Mrs Thomson was ordered to pay $372,016.10 directly to the creditor. Her defence of reliance on others' advice was rejected.

In Trinco (NSW) Pty Ltd (in liq) [2025] NSWSC 993, the NSW Supreme Court found that a person who had never been formally appointed as a director was nonetheless a de facto director liable for insolvent trading, ordering compensation of $10,059,175.52. While this was a liquidator-initiated claim, it demonstrates the breadth of the provision - even persons not formally on the company register can be caught.

Defences Available to Directors (s 588H)

Directors may raise defences under s 588H, including that they reasonably expected the company to be solvent, that they reasonably relied on information from a competent person or that they took all reasonable steps to prevent the debt being incurred. Since 2017, the "safe harbour" defence under s 588GA also protects directors who are actively developing a restructuring plan that is reasonably likely to lead to a better outcome than immediate administration or liquidation.

2. The "Zone of Insolvency": When Creditor Interests Override Shareholder Interests

While directors generally owe their duties to the company (and through it, to shareholders), a critical shift occurs when a company approaches insolvency. The foundational Australian authority is Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722.

In Kinsela, the directors of an insolvent funeral business - who were also the shareholders - granted themselves a lease of business premises at substantially below market value. Street CJ held that when a company is insolvent, its assets are "in a practical sense the creditors' assets and not the shareholders' assets". The directors' breach of duty could not be ratified by shareholder approval because, at the point of insolvency, the interests of creditors "intrude".

The High Court cited Kinsela with approval in Spies v R [2000] HCA 43. However, the duty is characterised as a restriction on shareholder ratification power - not a free-standing duty owed directly to creditors. This means creditors cannot sue directors directly for breach of this duty; it is enforced through the company, typically by a liquidator.

The Plymin Indicators of Insolvency

In ASIC v Plymin, Elliott & Harrison [2003] VSC 123, Mandie J set out the indicators that a company is insolvent - now the standard checklist used by liquidators and courts across Australia:

• Continuing losses
• Liquidity ratios below 1
• Overdue Commonwealth and State taxes
• Poor relationship with bank or inability to borrow further
• No access to alternative finance
• Inability to raise further equity capital
• Suppliers placing the company on COD terms
• Creditors unpaid outside normal trading terms
• Rounded payments not reconcilable to specific invoices
• Inability to produce timely and accurate financial information

Managing director Plymin was ordered to pay compensation and received a 7-year disqualification. Non-executive director Elliott was ordered to pay $1.4 million in compensation and received a 4-year ban. The Court of Appeal described Elliott's conduct as "inexcusable and showing continuing disregard for the position of creditors".

3. Statutory Derivative Action: Creditors Are Excluded

Sections 236-237 of the Corporations Act allow certain persons to bring proceedings on behalf of the company. However, standing is limited to members (shareholders) and officers - creditors do not have standing.

This was confirmed by the NSW Court of Appeal in Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661, where the Court unanimously held that the statutory derivative action under Part 2F.1A is not available once a company is in liquidation, and creditors lack standing under ss 236-237. However, the Court noted that the court's inherent jurisdiction may permit creditors to institute proceedings in the company's name in liquidation - though this is a narrower and more discretionary power.

4. Barnes v Addy: Knowing Receipt and Knowing Assistance

Where directors breach their fiduciary duties and third parties benefit from or assist in that breach, the equitable claims under Barnes v Addy (1874) LR 9 Ch App 244 may be available:

• Knowing receipt: A third party who receives trust property or property transferred in breach of fiduciary duty, with knowledge that the transfer was improper, may be liable to restore that property
• Knowing assistance: A third party who assists in a fiduciary's dishonest and fraudulent design may be liable for the resulting loss

These claims are typically brought by liquidators, not individual creditors, because the breach is of a duty owed to the company. However, the recoveries benefit all creditors. The most dramatic application was the Bell Group litigation, where the liquidator recovered approximately $1.5-$3 billion from banks that had knowingly received securities granted by the directors of the Bell Group companies in breach of their fiduciary duties while the companies were insolvent.

5. Misleading or Deceptive Conduct under the Australian Consumer Law

A creditor who has been personally misled or deceived by a director's conduct in trade or commerce can pursue the director directly under s 18 of the Australian Consumer Law. The director may face either:

• Direct (primary) liability: Where the director personally engaged in misleading conduct
• Accessorial liability: Where the director was "knowingly concerned in" the company's contravention

In Care A2 Plus Pty Ltd v Pichardo [2024] NSWCA 35, the NSW Court of Appeal confirmed that directors and employees can face personal liability for misleading conduct engaged in on behalf of a company. This is a direct claim by the creditor - not a derivative claim through the company.

6. Section 1324: Injunctions but Not Damages

Section 1324 of the Corporations Act gives any person "whose interests have been, are or would be affected" by a contravention standing to seek an injunction. This could potentially include creditors. However, the Queensland Court of Appeal in McCracken v Phoenix Constructions [2012] QCA 129 held that s 1324(10) cannot be used by creditors to recover damages from directors for breaches of civil penalty provisions (such as ss 180-184). The exclusive remedy regime for civil penalty provisions is in Part 9.4B.

This closed what had been seen as a potential "back door" for creditor damages claims against directors.

7. The Most Practical Avenue: Personal Guarantees

In practice, the most common and reliable mechanism by which creditors pursue directors personally is through personal guarantees. It is standard commercial practice for credit applications and supply agreements to include a director's personal guarantee and indemnity. If properly executed, this gives the creditor a direct contractual claim against the director if the company defaults.

This is not technically "suing the director as director" - it is enforcing a separate contractual obligation. But for most trade creditors, it is by far the most effective and commonly relied-upon avenue.

Summary: Creditor Pathways to Director Liability

Conclusion

The general rule - that directors owe duties to the company, not to creditors - has not changed. But the exceptions are significant. Insolvent trading claims under s 588M give creditors a direct statutory right of action against directors. The "zone of insolvency" doctrine ensures that directors cannot prioritise shareholder interests over creditor interests when the company is approaching insolvency. And the ACL provides a direct pathway for creditors who have been personally misled by a director's conduct.

If you are a creditor of a company that has failed or is failing, understanding which of these mechanisms applies to your situation is critical. Astris Law's dispute resolution and corporate teams regularly advise creditors on recovery strategies against directors, including insolvent trading claims, personal guarantee enforcement and ASIC cooperation pathways.

This article is for general information purposes only and does not constitute legal advice. You should seek professional advice tailored to your specific circumstances before acting on any information in this article. Liability limited by a scheme approved under Professional Standards Legislation.