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Client Update: ASIC guidance for directors on preventing insolvent trading

30 July 2010

In brief: The Australian Securities and Investments Commission has released a guidance note for directors that sets out what it considers to be the key principles in helping directors understand and comply with their duty to prevent insolvent trading. Partner Richard Harris (view CV) and Senior Associate Angela Martin report.

Introduction

The guide is a timely reminder of directors' duty to prevent insolvent trading and assists them to understand their obligations under the Corporations Act 2001 (Cth), as the Australian Securities and Investments Commission (ASIC) perceives them.

The guide is intended to be used by directors and to indicate the matters ASIC will consider in deciding to commence an investigation into insolvent trading. The guide may also be of interest to registered liquidators and creditors.

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The guide

Our previous Focus reported that ASIC released a consultation paper1 outlining proposals to help directors understand and comply with their duty to prevent insolvent trading. The paper attached a draft regulatory guide covering ASIC's proposed guidance to directors and requested comments on the consultation paper by 22 January 2010. The guide has now been finalised and released by ASIC, taking into account the feedback in submissions received.

The guide, RG 217, is divided into three parts:

  • section A provides a concise summary of the insolvent trading provisions in the Corporations Act;
  • section B sets out some of the key principles ASIC considers directors need to take into account in order to comply with the duty to prevent insolvent trading; and
  • section C sets out ASIC's approach to insolvent trading and the factors it will consider in assessing whether a director has breached their duty.2

It is important to remember that not only ASIC but creditors or a liquidator have the ability to take action against directors for allowing a company to trade while insolvent, and it is a matter for the court to ultimately determine whether a director has breached their duty in this regard.

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Conclusion

The guide gives helpful information to directors and their professional advisers on how ASIC will assess whether directors have breached their duty to prevent insolvent trading. Other interested parties, including registered liquidators and creditors, will also find it useful.

Footnotes
  1. Consultation Paper 124, released on 24 November 2009.
  2. A copy of RG 217 is available from the ASIC website at www.asic.gov.au/rg.

For further information, please contact:

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