On 24 November 2009, ASIC released Consultation Paper 124 which provides guidance for directors on their duty to prevent insolvent trading which is imposed by section 588G of the Corporations Act 2001.
The economic climate over the past two years has seen a growing number of corporate insolvencies. There is also evidence that directors, and particularly directors of small to medium size enterprises, do not fully understand their duty to prevent insolvent trading.
ASIC is seeking to assist directors to understand what their duty is and how they can minimise the risk of breaching it.
The Consultation Paper attaches a draft regulatory guide which addresses the legal background to the duty to prevent insolvent trading, the key principles that ASIC considers directors need to be aware of in performing their duty, and it provides guidance on how ASIC will assess whether a director has breached their duty in light of the principles that underlie the duty.
The principles which ASIC considers directors should follow when seeking to meet their duty to prevent insolvent trading are that directors:
- keep themselves informed about the company's financial affairs and regularly assess the company's solvency
- investigate financial difficulties immediately once they identify concerns about the company's financial viability
- obtain appropriate professional advice to help address the company's financial difficulties, and
- consider and act appropriately on the advice received and in a timely manner.
ASIC sought feedback on the Consultation Paper from directors, professional advisers and other interested parties by 22 January 2010. ASIC is currently considering the feedback and will conduct further consultation if necessary before finalising its policy on this issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
