Commercial Realities in Insolvency: The Court’s Lessons for Directors and Liquidators

The fine line between solvency and insolvency is rarely as clear-cut as unpaid debts or escalating tax liabilities may indicate. The Supreme Court of Victoria’s recent decision in Re Gemwood Projects Pty Ltd (In Liq) (No 2) [2025] VSC 819; [2026] VSC 269 offers an essential reminder to company directors that “commercial realities”, rather than the mere refusal to discharge debts, remains paramount in assessing corporate insolvency.

This case also serves as a cautionary lesson for liquidators – emphasizing the serious consequences of failing to comply with liquidator obligations, particularly during negotiations with creditors. For company directors and insolvency practitioners, this decision provides insightful guidance on –

1. How access to third-party funding impacts a company’s solvency; and

2. The high standard of conduct to which liquidators are held to throughout the liquidation process.

Dispute Background and Facts

Gemwood Projects Proprietary Limited (“Gemwood”) was a commercial cabinetry business operated by the Georgiou family, to which Mr Emilios Georgiou was appointed as the sole director.

Like many privately owned businesses, Mr Georgiou regularly funded Gemwood via a separate company he owned – allowing Gemwood to extinguish its debts when they became due and payable, thereby keeping its creditors at bay. However, by 2018, Gemwood owed more than $600,000.00 to the Australian Taxation Office (“ATO”) and the State Revenue Office (“SRO”), and Mr Georgiou was owed approximately $3,600,000.00. Accordingly, Mr Georgiou elected not to lend Gemwood further funds to extinguish its debts owed to the ATO and SRO.

In July 2019, Mr Georgiou appointed a liquidator for Gemwood. Upon his investigation, the liquidator identified two (2) potential unfair preference claims made by Gemwood, namely –

1. $432,731 paid to the ATO; and

2. $120,622 paid to the SRO.

Subsequently, the liquidator negotiated and settled with the ATO for $310,000 and the SRO for $72,000.

The liquidator then turned on Mr Georgiou and commenced proceedings against him for insolvent trading under section 588G of the Corporations Act 2001 (Cth) (“Corporations Act”) – alleging that Gemwood was insolvent and that Mr Georgiou permitted it to continue trading in that state.

Mr Georgiou brought a counter claim against the liquidator for his removal on the grounds that he deliberately withheld crucial information from ATO and SRO in negotiating the settlements with them, thereby breaching the obligations he owed as a liquidator of the company.

Questions Before the Court

The Court was required to decide –

1. Was Gemwood actually insolvent, and did Mr Georgiou breach his director duty to prevent insolvent trading?

2. Did the liquidator act improperly and should he be removed accordingly?

Was Mr Georgiou Liable for Breaching His Duty to Prevent Insolvent Trading?

Justice Croft of the Supreme Court of Victoria ultimately held that Mr Georgiou did not breach his director duty to prevent insolvent trading. Why? Because Gemwood was not insolvent.

In his judgement, Justice Croft highlighted the importance of considering ‘commercial realities’ in determining whether a company is insolvent. His Honour held that Gemwood, despite its financial struggles, had ongoing access to financial support from Georgiou’s separate company – despite Mr Georgiou refusing to loan funds from the separate company to Gemwood to extinguish its debts to the ATO and SRO. In light of this, His Honour considered that Gemwood could have technically called on funding from Mr Georgiou’s separate company if worse came to worse, meaning that Gemwood had the practical ability to pay its debts as they became due and payable. Simply – Mr Georgiou did not breach his duty to prevent insolvent trading because Gemwood was never insolvent.

Interestingly, the Court emphasised that commercial realities are crucial to determine whether a company can pay debts – which is distinct from whether the company merely failed to pay debts while it had funds to do so.

Should the Liquidator Be Removed?

Justice Croft ordered to remove the liquidator from Gemwood and that he shall not receive any remuneration or costs from the proceeding.

His Honour found that the liquidator’s insolvent trading claim against Mr Georgiou was in breach of the provisions of the Civil Procedure Act 2010 (Vic), including the overarching obligation to further the administration of justice and the duty to not initiate a claim without a proper basis.[1]

His Honour held that the liquidator breached his responsibilities by virtue of his misconduct, specifically –

1. The liquidator accepted a lower offer of $310,000 from the ATO, rather than an offer of $350,000, without informing Georgiou;

2. In negotiating the settlement with the SRO, the liquidator disclosed a statutory demand against Gemwood for $381,298.84 but failed to disclose that $432,731 had already been paid to the ATO – which would have substantially altered the SRO’s assessment and therefore the settlement; and

3. The liquidator failed to notify the ATO and SRO that Gemwood historically relied on Mr Georgiou’s separate company for funding, which was information directly relevant to the question of solvency and could have altered the settlements reached with the ATO and SRO.

Ultimately, the Court confirmed that it is justified for liquidators to be removed where they have engaged in deliberate concealment of material information from directors and creditors during negotiations.

Key Takeaways for Companies and Liquidators

Many companies wrongfully assume that they are insolvent simply because –

1. They are behind on tax obligations;

2. Creditors remain unpaid; or

3. Cash flow is tight.

However, Re Gemwood Projects Pty Ltd (In Liq) (No 2) confirms that insolvency is a question of whether a company can pay its debts when they become due and payable, and not whether a company chooses to discharge its debts.[2] This is determined by a range of factors and circumstances, particularly the commercial realities of the company and its access to funding.

Evidently, there can be a fine distinction between insolvency and solvency, so directors are encouraged to seek legal advice regarding this and what duties are imposed on them accordingly.

Company directors are also encouraged to closely examine and scrutinise the conduct and assessments of liquidators appointed to their companies. Directors should refrain from passively accepting liquidators’ conclusions and conduct without applying due diligence and critical thinking to their actions.

If you need assistance assessing your company’s solvency position, navigating directors’ duties or understanding the role of liquidators, please contact our Litigation & Dispute Resolution team on (03) 5273 5273.

[1] Civil Procedure Act 2010 (Vic) rr 16, 18.

[2] [2025] VSC 819; [2026] VSC 269.