ASIC SHEDS SOME LIGHT ON DIRECTOR'S DUTY TO PREVENT INSOLVENT TRADING
30/08/2010
ASIC has released Regulatory Guide 217 entitled Duty to prevent insolvent trading: Guide for directors, which is designed to assist directors to comply with their duty under the Corporations Act 2001 (Corporations Act) to prevent insolvent trading.
Under section 588G of the Corporations Act, directors of a company have a positive duty to prevent the company from incurring a debt if the company is insolvent or if the company is likely to become insolvent by incurring the debt. A person who fails to observe these duties commits a strict liability offence.
Insolvency is a term describing a person or a company’s inability to pay all their debts as and when they fall due.
ASIC now warns that directors must focus on their obligations to prevent insolvent trading and expects that this guidance will assist directors of small-to-medium enterprises, in particular, to fulfil this fundamental responsibility.
ASIC considers the following four factors as relevant indicators of whether a director has complied with their duty to prevent insolvent trading:
- whether they have kept themselves informed about the company’s financial position and affairs;
- whether they have regularly assessed the company’s solvency and investigated financial difficulties immediately;
- whether they have obtained appropriate advice to help address the company’s financial difficulties where necessary; and
- whether they have considered and acted in a timely manner on the advice.
ASIC pointed out that these factors are not the law, as such, but simply a Regulatory Guide from ASIC as to its intended policy on this issue. The Courts ultimately determine whether a director has breached their duty to prevent the company from incurring debts when insolvent. Courts may or may not refer to this guide.
The Regulatory Guide 217 is now available on ASIC website.
If you have any questions or concerns about whether you or your client may have breached their duty to prevent insolvent trading please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.