Insolvent trading: rare judicial consideration of temporary Covid-19 safe harbour defence
Star Recruitment Service Pty Ltd v Smith [2025] QSC 334
In case you missed it in the pre-Christmas rush, in mid-December the Queensland Supreme Court handed down a decision relating to a piece of legislation that rarely has the benefit of judicial consideration – the temporary COVID-19 safe harbour defence in section 588GAAA of the Corporations Act 2001 (Cth).
In the Supreme Court of Queensland’s decision in Star Recruitment Service Pty Ltd v Smith , it ordered the sole director to pay more than $1.1 million in compensation, plus $321,000 in interest, after the Court rejected the director’s attempts to rely on the temporary COVID‑19 safe harbour defence.
Background
Star Recruitment Service Pty Ltd supplied labour hire to a strawberry farming enterprise, GG Group (Qld) Pty Ltd, under a services agreement. Between August 2020 and November 2021, Star issued more than $1.63 million in invoices to GG which went unpaid. The company was placed into liquidation on 1 December 2021, and Star commenced proceedings against the director under ss 588G and 588M(3) of the Corporations Act. Section 588M(3) allows a creditor of a company in liquidation, in circumstances where the liquidator decides not to take the action, to bring insolvent trading proceedings themselves.
The sole director argued that the debts were incurred during the pandemic and thus protected by the COVID‑19 safe harbour in s 588GAAA. The Court rejected that argument and in doing so awarded:
- $1,108,441.71 in compensation;
- $321,422.28 in pre‑judgment interest; and
- costs in favour of the plaintiff.
Key findings
- This is a substantial precedent demonstrating the Court’s preparedness to impose seven‑figure personal liability on directors where they allow trading to continue in the face of mounting insolvency indicators.
- Justice Muir confirmed that section 588GAAA is not a universal protection for directors. Here, her Honour considered that the company had been insolvent from at least January 2021, and the debts were not incurred in a manner that satisfied the statutory criteria for the defence to be employed.
- Directors cannot rely on these types of protections where insolvency is deep-rooted in the company’s operations over a substantial period of time.
- The director asserted that losses flowed from rejected produce and agricultural supply issues rather than insolvency. The Court rejected those arguments and ruled that Star’s loss arose because the company incurred debts it could not pay, not because of broader commercial complications. Deflecting blame to suppliers or market conditions will not defeat an insolvent trading claim where the company’s inability to pay is clear.
What this means for directors
This decision confirms the importance of vigilance among directors. It is as important as ever for directors to monitor cashflow and creditor arrears with discipline and to document their financial decisions, both contemporaneously and with care. If the worst does eventuate, this case demonstrates that courts will examine what directors knew or ought to have known at the time debts were incurred and expect that directors will act early when faced with deteriorating conditions. More particularly, if a director wishes to rely on safe harbour the directors must have clear evidence to demonstrate that the statutory pre‑conditions were met.
What this means for creditors
For creditors, this judgment operates as a useful guide for the type of evidence that a section 588M claim brought by a creditor may require. In this case, aged payables, liquidity schedules, funding requests and contemporaneous correspondence were all relied upon. The judgment also provides some reassurance to creditors of the judiciary’s willingness to impose liability where records demonstrate sustained insolvent trading.
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