Australia: ASIC Releases New Guide For Directors On Duty To Prevent Insolvent Trading

Corporate Update
Last Updated: 12 August 2010
Article by Catherine Merity and Scott Harris

Against a backdrop of the highest levels of corporate collapses and insolvency for 12 months, the Australian Securities and Investments Commission (ASIC) has issued a new Regulatory Guide on the duty for directors to prevent insolvent trading.

The economic conditions over the past two years have seen an increasing number of insolvencies and recent data has shown a sharp rise in corporate collapses, with 914 companies being placed into administration during May and 848 in June 2010. The prevalence of insolvencies has also increased the focus on directors' obligations to prevent insolvent trading and monitor the financial position of the company. Several high profile company collapses including Allco Finance, Babcock & Brown and ABC Learning are now being examined for potential breaches of insolvent trading laws.

Against this landscape, ASIC has now released Regulatory Guide 217 - Duty to prevent insolvent trading: Guide for directors, which reminds directors of their legal duty to prevent insolvent trading and outlines:

  • the key principles that ASIC considers that directors need to take into account to prevent insolvent trading;
  • and the factors ASIC will consider in determining whether directors have breached that duty.

The duty to prevent insolvent trading

A director has a positive duty to prevent insolvent trading under section 588G of the Corporations Act 2001 (Cth) (Corporations Act), which provides that a director must prevent the company from incurring a debt if:

  • the company is already insolvent at the time, or would become insolvent by incurring the debt; and
  • there are reasonable grounds for suspecting that the company is already insolvent at the time, or would become insolvent by incurring the debt.

Consequences of breach of duty to prevent insolvent trading

A company is insolvent if it is unable to pay all of its debts when they fall due. A director who breaches his duty to prevent insolvent trading risks incurring serious civil and criminal penalties.

Proceedings may be brought by ASIC, liquidators or creditors of the company and the Court ultimately determines whether a director is in breach of the duty to prevent insolvent trading.

Civil consequences of a breach of the insolvent trading provisions include potential disqualification from managing a corporation, a fine of up to $200,000 and proceedings to recover compensation for loss as a result of incurring debts whilst trading insolvently. Criminal provisions may also apply in circumstances where the director has acted dishonestly, with penalties including a fine of up to $220,000 and imprisonment for up to five years.

Whilst there are a number of defences available to a civil claim, such as that the director expected (on reasonable grounds) that the company was solvent and would remain so after incurring the debt, there is no general defence available to protect directors who wish to assist a company to attempt to trade out of insolvency as is the case in certain other jurisdictions.

Key principles for directors

ASIC has set out four key principles that directors should consider in performing their role and which ASIC will take into account when assessing whether a director has breached his duty to prevent insolvent trading as follows:

  • Remain informed
  • Investigate financial difficulties
  • Obtain advice
  • Act in a timely manner

It is important to note that these duties apply to both executive and non-executive directors, each of whom must actively monitor the financial position of the company.

Key principle 1: Remain informed

A director must remain informed about the financial position of the company. A director is never excused or relieved from the duty to monitor and remain informed of the financial position of the company unless there is a good reason, such as serious illness or where the director is overseas for a prolonged period and has appointed an alternate director to act in his absence.

This means a director must continually:

  • ensure that the company maintains proper financial records and keep all relevant financial information; and
  • make relevant enquiries so as to have an understanding of the financial and cashflow position of the company at all times, such as through overseeing the preparation of budgets and management accounts and reviewing the company's ability to meet its obligations.

Where a director is not involved directly in the daily operation of the company or relies upon a third party for information, the director will need to ensure that the relevant person, such as an executive director or Chief Financial Officer, is suitably qualified, competent and reliable, and that appropriate systems are in place for the director to remain informed of the financial position of the company and to verify the reliability of the information being provided to him.

Key principle 2: Investigate financial difficulties

As soon as a director suspects that the company is in financial difficulties or may be insolvent, he should take positive steps to confirm the company's financial position and the options available to resolve the difficulties, and realistically consider the company's solvency before incurring any new debts.

Key principle 3: Obtain advice

As soon as a director has reasonable grounds to suspect that the company is in financial difficulties, he should consider obtaining advice from lawyers, accountants or other insolvency specialists regarding:

  • the solvency of the company and whether it is at risk of trading while insolvent; and
  • how the company may address its financial issues and whether it can realistically continue to trade out of the financial difficulties to return the company to long-term financial health.

Key principle 4: Act in a timely manner

If there are reasonable grounds to suspect a deterioration of the company's financial position, a director is at risk of breaching his duty to prevent insolvent trading if he does not take immediate steps to prevent the company incurring further debts.

If a director knows, or has reasonable grounds to suspect, that the company is insolvent he should take appropriate steps such as:

  • persuading other directors in writing not to incur further debts;
  • convening a board meeting resolving to prevent a debt from being incurred; and
  • obtaining advice as to how to deal with the company's financial difficulties.

If the Board is advised that the company cannot pay its debts as they fall due, the directors should consider appointing an external administrator immediately. If, however, after taking advice the directors determine that the company is not currently insolvent and formulate a restructuring plan, they should continuously monitor the company's financial position throughout the implementation of the plan to ensure that they are not at risk of trading insolvently at any time.


In the absence of reform to insolvency laws to provide a degree of leniency for directors to facilitate corporate restructuring without the risk of personal liability, Australian insolvent trading rules remain some of the strictest in the world. Accordingly, it is very important that directors understand the scope of their duty to prevent insolvent trading and seek advice as soon as the company falls into financial difficulties to assist in determining whether options are available to prevent insolvency and to ensure that their personal position is protected.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.