Creditor Duty Decision: Why Accountants Must Act (2025)

Accountants must heed the creditor duty decision because Australian courts have confirmed that, as insolvency risk emerges, directors’ duties increasingly prioritise protecting creditors—and advisers who ignore this shift expose clients (and potentially themselves) to insolvent trading, breach of duty, voidable transaction claims, and serious tax governance failures involving the ATO (including unpaid PAYG withholding and superannuation). In practice, once a client is nearing insolvency, “business as usual” advice on distributions, dividends, related-party loans, asset transfers, or selective ATO payment plans can quickly become legally unsafe and commercially disastrous.

What is the “creditor duty decision” in Australia?

The “creditor duty decision” refers to the High Court of Australia’s clarification that directors’ duties to act in the best interests of the company require directors to consider—and as insolvency nears, prioritise—creditor interests.

Key authority that must be understood in Australian practice includes:

• High Court: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 (often cited as foundational in Australia): where insolvency threatens, directors must consider creditor interests because creditors become the effective residual risk-bearers.
• High Court: BTI 2014 LLC v Sequana SA [2022] UKSC 25 (UK, persuasive only): provides modern analysis of when the “creditor duty” is engaged; Australian courts and practitioners refer to this reasoning even though it is not binding here.
• Corporations Act 2001 (Cth):

For accountants, the practical point is not academic: once insolvency is on the horizon, routine tax and accounting strategies can conflict with creditor protection principles.

Why does this decision change what accountants should do day-to-day?

It changes the risk settings of the advice, the required documentation, and the sequencing of payments, restructures, and lodgements.

From an Australian accounting practice perspective, the shift is:

• From: “Can we declare dividends/distributions? Can we repay director loans? Can we extract cash tax-effectively?”
• To: “Is the company solvent today and for the foreseeable future? Are we worsening creditor outcomes? Are we creating preferences? Can we evidence safe harbour? Are we misleading the ATO through non-lodgment or unrealistic payment plans?”

This is especially critical where the ATO is a major creditor (common in SMEs) through:

• PAYG withholding liabilities
• GST/BAS liabilities
• Superannuation guarantee (SG) obligations (often enforced via SG charge regimes and director penalty processes)

According to the ATO’s guidance on directors’ obligations and enforcement approaches (including director penalty regime and SG compliance messaging), the ATO treats non-payment of withheld amounts and SG particularly seriously because they are not “ordinary trade debts” in substance—they represent employee/withheld money obligations.

When is a company “close enough to insolvency” that creditor duty becomes critical?

Creditor-focused decision-making becomes critical when there is a real and not remote risk of insolvency, and it becomes paramount when insolvency is imminent or has occurred. The legal tests are nuanced, but accountants should apply practical solvency indicators and escalate early.

Common red flags accountants actually see in files:

• BAS and PAYG withholding consistently unpaid while trading continues
• Superannuation not paid on time (increasing SG charge exposure)
• ATO payment plans repeatedly defaulted or “rolled over”
• Inability to pay suppliers within terms; reliance on “stretching” creditors
• Overdrawn director loan accounts and pressure for cash extraction
• Post-year-end journal entries masking cash stress (e.g., capitalising expenses to manage profit)
• Frequent related-party transactions without documentation
• Negative working capital; worsening cash conversion
• Bank covenant breaches or inability to refinance

At this point, continuing to process accounts and tax “as normal” without a solvency overlay is professionally unsafe.

What are the accounting advice areas most affected (and most litigated)?

The high-risk areas are the ones that move value away from creditors or create unequal treatment.

1) Should dividends or trust distributions proceed if solvency is doubtful?

No—if solvency is doubtful, dividends/distributions should be treated as high risk and generally avoided unless solvency can be clearly evidenced and documented.

Practical exposure points:

• Unlawful dividends (if paid when company cannot pay debts as and when due)
• Breach of directors’ duties (failing to prioritise creditors)
• Voidable transactions risk if insolvency follows and the payment is attacked in liquidation

2) Should directors repay themselves or clear Division 7A when cash is tight?

Not without careful structuring and solvency assessment. This is where tax compliance can collide with creditor duty.

• Division 7A (ITAA 1936, Division 7A) issues often lead to pressure to “move cash” to avoid deemed dividends.
• However, repaying director/shareholder loans while trade creditors and the ATO go unpaid is a classic fact pattern in unfair preference and breach-of-duty claims.

A more defensible approach is often:

• Document solvency assessments
• Seek restructuring advice early (safe harbour planning)
• Consider whether Division 7A-compliant loan agreements and realistic repayment schedules can be implemented without stripping cash needed for creditors

3) Are ATO payment plans always the best option?

No. An ATO payment plan can be appropriate, but it must be realistic and must not be used to conceal insolvency or to “buy time” while preferring other parties.

Accountants should ensure:

• BAS/IAS lodgements remain current (non-lodgment is a major risk escalator)
• Cashflow forecasts support the plan
• The plan does not involve paying related parties ahead of the ATO without justification

The ATO’s public guidance consistently signals that engagement, timely lodgment, and accurate disclosure are essential to workable arrangements—and that enforcement escalates where there is disengagement, repeated default, or phoenix-like behaviour.

4) How do voidable transactions affect bookkeeping and year-end adjustments?

Voidable transaction risk is not merely legal theory; it arises from ordinary ledger events.

Common examples:

• Unfair preferences: paying one creditor (often the ATO) more than others shortly before liquidation can be clawed back under Corporations Act Part 5.7B, depending on the circumstances.
• Uncommercial transactions: asset transfers or undervalue dealings to related parties.
• Director-related transactions: repayments, “management fees”, backdated adjustments.

Accountants must treat these transactions as “red flag postings” requiring partner-level review and documentation.

What should accountants do differently to protect clients and themselves?

Accountants should adopt a structured “financial distress protocol” aligned to Corporations Act risk and ATO enforcement realities.

1) How should solvency be assessed and evidenced?

Accountants should insist on a documented solvency process, not informal judgement.

Minimum defensible steps include:

1. Obtain up-to-date management accounts (not last year’s tax financials).
2. Prepare a 13-week cashflow forecast (weekly) and a 12-month forecast (monthly).
3. Reconcile ATO liabilities (GST, PAYG withholding, PAYG instalments) to the ATO account where possible.
4. Verify superannuation payment status and due dates (and quantify any SG charge exposure).
5. Review aged payables/receivables and identify disputed vs undisputed debts.
6. Document director decisions and the advice provided.

2) When should safe harbour (s 588GA) be raised?

Safe harbour should be raised as soon as there is a risk of insolvent trading and the director is pursuing a genuine turnaround plan.

Under Corporations Act s 588GA, protections can apply where directors develop and implement a course of action reasonably likely to lead to a better outcome than immediate liquidation/administration, and certain baseline obligations are met.

Accountants can contribute by:

• Building credible cashflow and turnaround models
• Improving reporting cadence
• Supporting timely lodgements and payroll compliance evidence
• Coordinating with insolvency/restructuring practitioners and lawyers

3) What should be said (and not said) in engagement letters and file notes?

Accountants should avoid drifting into legal advice, but must clearly identify when legal insolvency risk is present and recommend referral.

File documentation should:

• Record solvency red flags observed
• Confirm limitations: “We are not providing legal advice”
• Record that restructuring/legal advice was recommended
• Record that client decisions were made with awareness of risks

This is critical for professional risk management and is frequently scrutinised in disputes.

Practical scenarios Australian accountants will recognise (and how creditor duty changes the advice)

Scenario A: “We’ll just pay the ATO to keep them quiet”

What changes in advice:

• Stress-test whether the business is actually viable
• Keep lodgements current first (often a prerequisite for any sensible plan)
• Avoid paying related parties while the ATO and employees remain unpaid
• Document why payments improve overall creditor outcomes (not just one creditor)

Scenario B: “Let’s declare a dividend before year-end to manage tax”

What changes in advice:

• Replace dividend planning with solvency planning
• Consider alternative structures that do not extract cash
• Escalate to legal advice where a dividend is insisted upon

Scenario C: “Director loan is overdrawn; we need Division 7A repayments now”

What changes in advice:

• Consider Division 7A loan documentation and realistic MYR planning (rather than immediate cash movements)
• Ensure any repayment strategy does not worsen insolvency risk
• Ensure journal entries reflect reality and are not used to mislead stakeholders

How does technology reduce creditor duty risk in 2025 (and why MyLedger matters)?

Accurate, current data is the foundation of defensible solvency decisions, and manual bookkeeping delays are a direct risk factor.

This is where AI accounting software Australia solutions built for practice workflows materially reduce exposure—especially around automated bank reconciliation and ATO-driven liability management.

A practical comparison accountants care about:

• Reconciliation speed: MyLedger = 10–15 minutes per client, Xero/MYOB/QuickBooks (typical manual-heavy practice workflow) = 3–4 hours
• Automation level: MyLedger = AI-powered reconciliation with ~90% auto-categorisation, competitors = more manual coding and rule maintenance
• Working papers: MyLedger = automated working papers (including BAS reconciliation, Division 7A automation, depreciation), competitors = commonly manual Excel-based packs
• ATO integration accounting software: MyLedger = complete ATO portal integration (ATO statements, transactions, client details, due dates), competitors = typically limited or indirect ATO connectivity
• Pricing model: MyLedger (forecast) = $99–199/month unlimited clients (currently free during beta), competitors = commonly per-client fees that scale with your client base

For creditor duty compliance, the key benefit is timeliness: if you can move from bank statement to reliable management accounts quickly, you can identify insolvency risk earlier, document decisions properly, and avoid the “late discovery” problem that fuels insolvent trading and preference disputes.

What governance practices should accounting firms implement now?

Accounting firms should implement a formal distress governance checklist to standardise responses across staff and clients.

Recommended minimum controls:

• A “solvency risk trigger” policy (e.g., repeated ATO arrears + SG unpaid + negative cashflow)
• Partner review required for:
• Mandatory referral protocol to:
• Evidence pack standard:

Next Steps: How Fedix can help

If your firm is seeing more clients under ATO pressure, tighter cashflow, and increasing insolvency risk, the practical need is faster, cleaner data and automated compliance workflows.

Fedix’s MyLedger is designed for Australian accounting practices to reduce distress-risk blind spots by:

• Delivering automated bank reconciliation in 10–15 minutes (often 90% faster than manual workflows)
• Automating working papers that typically become urgent during distress (BAS reconciliation software outputs, Division 7A automation, depreciation schedules)
• Supporting ATO integration accounting software workflows, including importing ATO statements/transactions and tracking due dates

Learn more at home.fedix.ai and consider trialling MyLedger (free during beta) to tighten governance, accelerate monthly close, and reduce creditor-duty risk through earlier detection and better documentation.

Frequently Asked Questions

Q: Is “creditor duty” a separate duty owed directly to creditors?

Q: What should an accountant do when a client can’t pay BAS and superannuation?

Q: Can paying the ATO protect directors from insolvent trading?

Q: How does Division 7A interact with creditor duty in a distressed company?

Q: What records should accountants keep to reduce professional risk?

Disclaimer

This article provides general information from an Australian accounting practice perspective and is not legal advice. Directors’ duties, safe harbour eligibility, and voidable transaction risk depend on specific facts and can change with legislation and case law. Professional advice from a qualified lawyer and/or registered liquidator should be obtained for any client facing financial distress.