In December 2025, the Queensland Supreme Court handed down a judgment that will have immediate implications for directors who traded through the pandemic, writes Roy Kim, Jason Wang, and Seunghyun Jin.
Star Recruitment Service Pty Ltd v Smith [2025] QSC 334 resulted in a director being held personally liable for over $1.1 million in insolvent trading debts – a stark reminder that while the COVID-19 safe harbour offered temporary respite, it was never a permanent shield.
The debate over section 588GAAA
For more than four years, insolvency practitioners have been debating the proper construction of section 588GAAA of the Corporations Act 2001 (Cth). The central question has been this: does the protection only apply if a company entered administration or liquidation during the safe harbour period, or does it extend to situations where the appointment occurred afterwards?
Justice Muir’s decision provides the first comprehensive judicial analysis of this vexed question. The judgment offers the much-needed clarity and aligns with the true legislative purpose of the emergency provisions – while simultaneously reinforcing the primacy of the cash flow test for insolvency.
The facts
The case concerned a strawberry farming operation near the Glasshouse Mountains, where the sole director had engaged the plaintiff, Star Recruitment Service, to supply workers under a services agreement. Between August 2020 and November 2021, the company accumulated debts exceeding $1.6 million to Star Recruitment, and it was ultimately placed into liquidation on 1 December 2021 – nearly a full year after the safe harbour period had expired on 31 December 2020.
Resolving the statutory ambiguity
The plaintiff argued that section 588GAAA(1)(c), which refers to debts incurred “before any appointment during that period of an administrator, restructuring practitioner or liquidator of the company”, required the company to be placed into external administration during the safe harbour period for the protection to apply. This interpretation had found favour among several experienced insolvency commentators.
However, Justice Muir rejected that construction. Her Honour found the words “any appointment during that period” contemplate the possibility that an appointment might occur during the safe harbour period, but do not mandate that one must. As Her Honour observed, the plaintiff’s interpretation would lead to an “internal inconsistency” within the provision: Parliament expressly specified a safe harbour period for director protection, yet that time frame would be arbitrarily reduced if an external administration appointment were required before the period ended.
What makes this reasoning particularly compelling is its focus on legislative purpose. The CERPO Act was introduced amid the most severe economic disruption in living memory, with Parliament expressly intending to “keep Australians in jobs and businesses in business” by providing “temporary relief for directors from any personal liability for trading while insolvent”. It would have been self-defeating to require companies to appoint administrators during the safe harbour period to obtain protection – the very outcome the legislation was designed to prevent.
Section 588GAAA ultimately shielded the defendant from liability for approximately $523,720 in debts incurred during the safe harbour period. However, he was found liable for the balance of $1,108,441.71 for debts incurred after 1 January 2021, when the protection no longer applied.
Cash flow insolvency: The Plymin indicators
The judgment also provides critical guidance on the cash flow test for insolvency under section 95A of the Corporations Act. Justice Muir reiterated that the question is whether a company can pay its debts as and when they fall due – not whether a balance sheet shows assets exceeding liabilities. The court found that several of the well-known Plymin indicators were present: a liquidity ratio that had fallen to 0.41 by the 2021 financial year (and to 0.11 at liquidation), over 60 per cent of liabilities more than 90 days overdue, and a reliance on unsecured loans merely to continue trading. External funding offers that were conditional and never crystallised could not, as a matter of commercial reality, rescue the company from its chronic state of illiquidity.
Key takeaways
For practitioners, this decision carries three important lessons. First, directors who relied on the COVID-19 safe harbour can now do so with greater confidence, knowing that the protection was not contingent on entering external administration during 2020.
Second – and this is crucial – the safe harbour does not extinguish the debts incurred during that period, and those debts remain relevant to any assessment of insolvency after the protected period ends. Directors who emerged from the safe harbour still carrying unpaid debts could not simply pretend those obligations had vanished. As Her Honour observed, the existence and non-payment of debts incurred during the safe harbour period are “obviously relevant” to the ongoing obligation not to trade while insolvent after that period ends.
Third, directors must continually assess their company’s cash flow position against the Plymin indicators. A sole director with day-to-day access to the company’s financial records cannot escape liability by pointing to speculative or conditional funding arrangements. The court was clear: the capacity to raise external funds must be judged “in a practical and businesslike way by reference to commercial realities” – not hopeful expectations.
Looking ahead
As insolvency litigation arising from the pandemic years continues to filter through the courts, Star Recruitment v Smith will likely stand as an important authority on both section 588GAAA and the practical application of the cash flow insolvency test. For directors, the message is clear: the COVID-19 safe harbour served its purpose, but those who continued trading beyond its expiry without addressing underlying solvency issues now face substantial personal exposure.
Roy Kim is a partner, Jason Wang is a counsel, and Seunghyun Jin is a solicitor at Baystone Legal.
