When do you tell the board your company might be insolvent?
There is a question that sits in the back of every director's mind at some point in a small company's life, usually when cash is tight and the mood in leadership meetings has quietly shifted. The question is: do we have a problem serious enough to say out loud? It is also, quietly, a question about director obligations.
Most people wait too long to say it. Some never say it at all. And that gap between the moment you first suspect something is wrong and the moment it becomes a formal board conversation is where a significant amount of director liability gets created.
This article is about how to navigate that gap. Not as a lawyer (I am not one), but as someone who has sat in that room, raised the question formally, and had to work out in real time what 'doing the right thing' actually looked like under pressure.
Director duties under the Corporations Act, briefly
Under the Corporations Act 2001, a company is solvent if it can pay all its debts as and when they fall due. Section 588G makes it a civil offence for a director to allow a company to incur a debt when the company is insolvent, or when there are reasonable grounds to suspect it will become insolvent as a result of incurring that debt.
The exposure is not limited to the point of formal insolvency. The concept of 'reasonable grounds to suspect' does a lot of work here. If warning signs are present and documented, and you as a director continue to act without raising the issue, the legal risk starts from that moment, not from the day an administrator is appointed.
That is why timing matters. And why I think the right instinct is to raise your concerns earlier than feels comfortable, rather than later.
The warning signs are more obvious than most people admit
ASIC publishes a list of indicators of potential insolvency. It is not an obscure document; it is publicly available and referenced regularly in insolvency proceedings. The list includes things like: ongoing losses, poor cash flow, creditors not being paid on time, overdue statutory obligations (including tax), and the company becoming increasingly dependent on a single client or investment event to survive.
One important nuance for scale-up directors specifically: ongoing losses are not, by themselves, a warning sign in a company that is deliberately burning cash to grow. For a Series A or Series B company, operating at a loss is the plan. The more meaningful signal is loss of control over the burn — and in a funding-dependent business, that often shows up as failure to hit the milestones required to trigger the next tranche of pre-committed investment. When the company is consuming cash faster than projected, the fundraising timeline is slipping, and management cannot provide a credible updated runway, that combination is the real alert. Planned burn is a strategy. Uncontrolled burn with no clear path to the next capital event is a solvency concern.
In my experience, the honest answer for a lot of small companies going through difficulty is that multiple items on that list are present simultaneously. The problem is rarely that people cannot see them. It is that there is enormous social and commercial pressure to treat them as temporary, manageable, and not quite serious enough to warrant a hard conversation at board level.
I have been in situations where more than half the commonly cited warning signs were visible if you were looking. The question isn’t whether you could see them. It’s whether you said so and did something about them.
Raise it verbally first. Then put it in writing.
My approach was to raise solvency concerns verbally at a directors meeting first, on the record. That gives the other directors and management the opportunity to respond, provide information, and clarify the position. If the concern is addressed adequately, great. If it is not, and you come away still uncertain or still concerned, then the next step is to put it in writing.
A formal written communication to the board that clearly states your concern about the company's solvency serves a few purposes. It creates a record. It makes the concern undeniable. It triggers an obligation for the board to take the question seriously. And it protects you personally, because if the situation deteriorates later, your documented position matters.
I sent a formal email to my board setting out my concerns about solvency, including the specific warning signs I believed were present, my view that the discussion needed to extend beyond a single subsidiary to the group as a whole, and a request for a board meeting to address it properly. I followed it up when there was no substantive response.
Writing it down felt uncomfortable. It felt like an escalation. It was an escalation. That was the point.
What to ask for when you raise it
Raising the concern is necessary but not sufficient. You also need to make clear what would satisfy you that the position has been properly reviewed. In practice, that means asking for consolidated financial reporting across the group (not just one entity), cash flow projections that are current and realistic, and ideally an independent review, whether that is a CFO on a short engagement, an external accountant, or a formal solvency opinion.
In my case, I put forward two independent parties (one a CFO, one a partner at a mid-tier accounting firm) who had offered to assist with a review. That offer was rejected. The solvency review that was eventually convened was limited and, in my view, inadequate given the complexity of a multi-entity group.
The lesson: document not just your concern, but the response to it. If you propose a proper review and it is declined, that matters. If you set out conditions for signing off on solvency and they are not met, that matters too. Your paper trail is your protection.
The hardest part: when you are being pressured to sign off
There is a specific dynamic that arises in small, investor-backed companies that is worth calling out directly. The pressure to confirm solvency — or at least not to actively contest it — often coincides with a funding event, an investor deadline, or a critical commercial negotiation. The implicit message is: we need this resolved by Friday, and raising a problem now is not helpful.
That pressure is real. It comes from people you may like and respect. And it is precisely the moment when your duty as a director is clearest.
Your obligation is not to make the fundraising process easier. It is to form an honest view of the company's financial position and act on it. If you cannot sign off on solvency because you do not have adequate information, or because the information you have gives you genuine cause for concern, say so. In writing. With a clear statement of what you would need to change your position.
That is not obstruction. That is governance.
What comes after you raise it: Safe Harbour
Flagging a concern is necessary. But for a director who wants to fix the problem rather than simply record it, there is a formal mechanism worth knowing about. Section 588GA of the Corporations Act provides protection from insolvent trading liability for directors who are developing a course of action reasonably likely to lead to a better outcome for the company than immediate administration. This is known as Safe Harbour. Entering it typically requires a board resolution, engagement of a properly qualified restructuring advisor, and ongoing steps to keep employee entitlements and tax obligations current. It is not a shield against consequences — it is a structured way to buy time and take genuine remedial action. If you have raised concerns formally and the board is willing to act, Safe Harbour is often the right next conversation to have (Note: this reflects my understanding as a director, not legal advice). If you want want to know more about Safe Harbour the Australian Institute of Company Directors (AICD) has a number of resources including this handy info sheet for directors.
What this looks like in practice
To be explicit about what this looked like in my own situation: I raised solvency concerns at a board meeting in September, which at the time felt like a significant escalation even though in hindsight it was the obvious and necessary thing to do. I escalated formally in writing in December, setting out multiple concerns including historical failures to maintain ATO payment plans, persistent liabilities that had been due and payable for months without settlement, and inadequate financial reporting across a complex multi-entity structure. I requested an independent review. I set written conditions before I would sign off on solvency. I followed up when those conditions were not addressed.
The company eventually went into voluntary administration roughly eighteen months later. I am not suggesting that earlier action would have changed the outcome — that is impossible to know. What I am confident about is that raising the issue formally, early, and in writing was the right thing to do. Both as a matter of duty and as a matter of basic professional integrity.
A few practical principles
Raise it earlier than feels comfortable. If you are wondering whether to say something, you should probably say it.
Put it in writing. A verbal concern raised in a meeting is important. A written concern sent to the board is a record.
Specify what would resolve your concern. Vague unease is hard to respond to. A clear set of information requirements is not.
Document everything: what you asked for, when, and what happened in response. For directors, that means board minutes, written follow-ups to verbal conversations, and dated email chains. Your contemporaneous records are more valuable than you think they will be.
Get independent advice. Whether that is a lawyer, an accountant, or an insolvency specialist, do not navigate this alone if you can help it.
And if you are in a situation where your concerns are being minimised, deflected, or simply ignored, that in itself is information. Act on it.
Lessons learned
Raising solvency concerns formally is uncomfortable. You are sitting in a meeting with people you have worked alongside, often for years, introducing a question that nobody wants on the table. When I did it, the tension was immediate and palpable, it sucked the air out of the room in a way I had not fully anticipated and honestly was not entirely prepared for. The pressure to stay quiet, give it another month, wait for the next funding round, is real. And it does not help. Every board meeting where the question goes unasked, every set of accounts that does not arrive, every ATO obligation quietly deferred, is another data point you are choosing not to act on. By the time it feels truly urgent, you have often already lost the window where acting early would have mattered.
Raising it formally also changes the dynamic in ways you cannot fully predict. Some boards engage genuinely; others deflect or obstruct. Either way, the response is informative. A board that takes the question seriously and provides transparent reporting is one you can work with. One that actively resists is telling you something important.
The other lesson is about documentation, whose value you only appreciate in hindsight. At the time, putting concerns and conditions in writing can feel legalistic. Later, when you need to demonstrate that you raised concerns early and in good faith, that paper trail is the difference between a credible account and one you cannot substantiate.
Key takeaways - for directors and NEDs in small companies
The threshold for raising a solvency concern formally is lower than most people assume. You do not need to be certain the company is insolvent. You need reasonable grounds to suspect it might be. It is also worth noting that the exposure under the Corporations Act extends not just to current insolvency but to circumstances where the company would become insolvent as a result of incurring a particular debt. In other words, the question is not only 'are we insolvent now?' but 'would this decision make us insolvent?' If genuine uncertainty persists after a reasonable opportunity to review the available information, that is the moment to act. (Note: this reflects my understanding as a director, not legal advice.)
Verbal is a start. Written is a record. Raise it verbally at a board meeting first, then follow up in writing if the concern is not adequately addressed. Keep copies. Date everything.
Specify what you need. A vague concern is easy to dismiss. A written request for consolidated accounts, current cash flow projections, and an independent review is not.
Investor pressure is not a governance justification. If you are being asked to sign off on solvency because a funding round depends on it, that is precisely the moment to slow down, not speed up. Your duty is to the company, not to the timeline of a transaction.
Also see my article: NED Roles in SMEs and Startups: Why They Fail and What Works
Key takeaways - for operators and COOs who are not on the board
If you can see the warning signs, you are probably not alone. People close to the operations of a struggling company often know more than they realise about its financial trajectory. The question is whether that knowledge gets surfaced or stays unspoken.
If you are not a director, you cannot raise a formal solvency concern in the same way. But you can document what you observe, raise concerns through appropriate channels, and make sure the people who do have formal obligations are aware of what you are seeing. That is not overstepping. That is doing your job well.
Your paper trail as a COO looks different to a director's: it’s Slack messages, emails, and project logs — but it matters just as much. If a CEO instructs you verbally not to pay the tax bill this month, follow up in writing: 'Per your instructions on our call, I want to flag that delaying this ATO payment may signal insolvency issues.' That email is what protects you.
One more thing worth knowing if you are a COO: under the Corporations Act, a COO (Chief Operations Officer) is typically deemed an officer of the company, and that carries obligations. If the company goes into liquidation, you will be required to assist the liquidator with whatever they need. If the liquidator finds you at fault in the conduct of the company's affairs, they have the power to publish those findings in the creditors report. That publication can expose you to legal action by creditors or shareholders. It is not the same liability exposure as a director, and it is not the same level of personal risk, but it is not nothing either. Document your actions and your concerns throughout. (Note: this reflects my understanding as a practitioner, not legal advice — if you are in a situation where this is live, talk to a lawyer.)
Frequently asked questions
When should a director first raise solvency concerns at board level? You should raise concerns as soon as you have reasonable grounds to suspect the company may be unable to meet its debts as they fall due. You do not need certainty of insolvency. Waiting for certainty often means raising it too late to protect yourself or the company.
What is Safe Harbour under Section 588GA of the Corporations Act? Safe Harbour provides directors with protection from insolvent trading liability while they develop a course of action reasonably likely to lead to a better outcome for the company than immediate administration. It requires engagement of a properly qualified restructuring advisor and continued compliance with employee entitlements and tax obligations. It is not automatic — directors need to actively enter Safe Harbour and meet its conditions.
Can a COO be held personally liable if the company becomes insolvent? Like a CEO, a COO is typically deemed an officer of the company under the Corporations Act, which carries obligations distinct from those of a director. While a COO does not face the same insolvent trading exposure as a director, if a liquidator finds them at fault in the conduct of the company's affairs, those findings can be published in the creditors report and may lead to legal action by creditors or shareholders.
I'm John Chung, I've spent over 15 years building and running startups and scale-ups as a founder, operator, and non-executive director (GAICD). I write about the gap between how companies are supposed to operate and how they actually operate.
All content is produced by me, reflecting my own experience and judgement. Generative AI tools were used for editorial support, in this case Claude specifically.