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
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
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
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
obtain appropriate professional advice to help address the
company's financial difficulties, and
consider and act appropriately on the advice received and in a
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
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.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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