Preventing insolvent trading: the focus of new ASIC report

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ASIC has today released a report that sets out the key messages and outcomes of its national insolvent trading program (NITP).

The report, National Insolvent Trading Program Report (REP 213) will be beneficial to directors of companies, company advisers (including accountants and lawyers) and other interested stakeholders to assist them in understanding and complying with their duty under the Corporations Act 2001 (Corporations Act) to prevent insolvent trading.

The NITP was aligned with ASIC’s oversight responsibility in monitoring compliance and conduct by company officers in relation to their obligations and behaviour where corporate failure occurs.

The program focused on companies which were in financial distress or nearing insolvency. Through on site visits, the program encouraged directors to seek professional advice at an early stage to address solvency issues. During the period 2006 to 2010, ASIC visited over 1,530 companies displaying solvency concerns. As a result, directors have an increased awareness of their duties.

There are four key messages from the NITP that directors should take into account in carrying out their role.

Directors must:

  • maintain appropriate books and records
  • identify insolvency concerns and assess available options
  • seek professional advice
  • act in a timely manner.

‘Where a director follows these key messages, they are less likely to breach their duties under the Corporations Act and by seeking advice at an early stage, better results may be achieved for external stakeholders, including employees and creditors’, ASIC Commissioner, Michael Dwyer said.

ASIC has previously released Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors (RG 217) which sets out key principles which ASIC considers directors should follow to meet their obligation to prevent insolvent trading. The development of RG 217 was assisted via the outcomes and observations of the NITP.

Key indicators of insolvency include, but are not limited to, ongoing trading losses, cash flow difficulties, outstanding trade creditors and the inability to obtain further finance.

ASIC’s forward plan for Insolvency Practitioners and Liquidators will focus on the conduct of liquidators and insolvency practices, particularly in relation to independence and remuneration. ASIC will however continue to review companies displaying significant insolvency indicators and encourage directors to seek appropriate advice early.

Download the National Insolvent Trading Program Report (REP 213)

Background

RG 217 also details factors which ASIC will consider when deciding to bring proceedings against a director for allowing a company to trade while insolvent (including criminal proceedings and proceedings to recover comprehension for loss resulting from insolvent trading). The Corporations Act imposes on directors a positive duty to prevent insolvent trading: see section 588G.

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