Director’s duty to prevent insolvent trading

ASIC has today released regulatory guidance to assist directors to understand and comply with their duty under the Corporations Act 2001 (Corporations Act) to prevent insolvent trading.

The Corporations Act requires a director of a company to prevent the company from incurring a debt if the company is insolvent, or if the company will become insolvent by incurring the debt or a range of debts including the debt.

“ASIC first contemplated issuing guidance during the downturn in economic conditions when a rise in corporate insolvencies was expected. We thought that the market, including directors and their professional advisers, would benefit from clarification about the factors we consider when deciding to commence an investigation in relation to possible insolvent trading, and issued some proposals in November last year”, ASIC Commissioner, Michael Dwyer said.

“It is important that directors focus on their obligations to prevent insolvent trading and we expect this guidance will assist directors of small-to-medium enterprises, in particular, to fulfil this fundamental responsibility”, Mr Dwyer said.

Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors sets out four key principles which ASIC considers directors should follow to meet their obligation to prevent insolvent trading, That is, to:

* keep themselves informed about the company’s financial position and affairs;
* regularly assess the company’s solvency and investigate financial difficulties immediately;
* obtain appropriate professional advice to help address the company’s financial difficulties where necessary; and
* consider and act in a timely manner on the advice.

RG 217 also details factors which ASIC will consider when deciding to bring proceedings against a director for allowing a company to trade while insolvent (including criminal proceedings and proceedings to recover compensation for loss resulting from insolvent trading).